[2024] KETAT 102 (KLR)

Cellnet Limited v Commissioner of Domestic Taxes (Tax Appeal 1514 of 2022) [2024] KETAT 102 (KLR) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 102 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1514 of 2022

RM Mutuma, Chair, BK Terer, EN Njeru, M Makau & W Ongeti, Members

February 2, 2024

Between

Cellnet Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The appellant is a private limited liability company incorporated under the Companies Act, cap 486 (Repealed) of the laws of Kenya and is a tax resident in Kenya registered with the Kenya Revenue Authority. The appellant's principal business activity involves the sale of airtime, connector packs, mobile phones and accessories, computer equipment and networking accessories.

2. The respondent is a principal officer appointed under and in accordance with section 13 of the Kenya Revenue Authority Act, cap 469. Kenya Revenue Authority, KRA, is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The respondent conducted investigations on the appellant for the period July 2015 to June 2020 and upon conclusion issued an assessment of Kes 245,825,276. 00 on June 28, 2022. The appellant lodged an objection against the respondent's assessment on July 6, 2022 on iTax and a detailed objection on September 2, 2022.

4. Dissatisfied with the respondent's assessments, the appellant objected to the CIT and assessments on July 6, 2022 via iTax.

5. That the respondent declared the appellant’s objection invalid vide the letter dated July 19, 2022 on the basis that the objection did not meet the requirements of section 51 (3) of the Tax Procedures Act, 2015.

6. The respondent reviewed and considered the appellant’s notices of objection and on November 1, 2022, the respondent issued an objection decision partially allowing it and confirming an assessment amounting to Kes 12,982,500 (exclusive of penalties and interest).

7. The appellant being dissatisfied with the respondent's objection decision it filed a notice of appeal with the tribunal on November 30, 2022, and served the respondent with the same.

The Appeal 8. The grounds of the appeal are outlined in the memorandum of appeal dated the December 14, 2022 as summarized hereunder: -a.That the respondent erred by assessing Value Added Tax (VAT) of Kes 12,982,500. 00 on the variance between sales declared in the income tax returns and the VAT returns without considering exempt sales not declared in the VAT returns by the appellant.

The Appellant’s Case 9. The appellant’s case is premised on the following herein under filed documents:-a.The appellant’s Statement of Fact dated and filed on December 14, 2022. b.The appellant’s written submissions dated July 5, 2023 and filed on July 17, 2023.

10. The appellant averred that the respondent conducted a tax investigation on the appellant's operations for the period July 2015 to June 2020 which resulted into a Corporation Income Tax (CIT) and Value Added Tax (VAT) assessment of Kes 245,825,276. 00 communicated to the Appellant vide a notice of assessment letter dated June 28, 2022.

11. That the aforementioned notice of assessment letter demanded CIT of Kes 134,702,738. 00 and VAT of Kes 111,122,538. 00 based on the following issues:i.Banking analysis - The respondent analyzed the credits and deposits as per the appellant's bank statements and identified a variance between the expected sales as per the bank analysis versus the sales declared in the appellant’s annual corporation tax returns and VAT returns of Kes 519,151,178. 00 and Kes 687,425,877. 00, respectively.ii.Pay as You Earn (PAYE) analysis — The respondent compared the salaries expensed in the appellant's annual corporation tax returns and salaries declared in the PAYE returns and noted an overstatement of Kes 6,553,913. 00 for the financial year (FY) 2016.

12. The appellant stated that the respondent with an aim to validate the objection, it requested the appellant to provide additional information and documents, which the appellant provided vide a letter dated August 22, 2022.

13. The appellant's grounds for the objection were as follows:i.That the respondent erred in deeming all amounts received into the bank accounts of the appellant as revenue chargeable to tax with the exception of some adjustments such as movement in debtors and output VAT.ii.The respondent erred by assessing corporation tax on the variance between salaries declared in the income tax returns and PAYE returns without considering employee related expenditure declared in the income tax returns such as employee pension contribution, intercompany debit notes and salaries not included in the PAYE returns due to complexities of obtaining KRA Personal Identification Number (PIN).

14. The appellant stated that the respondent partially vacated and confirmed some of its assessments in response to the appellant's objection vide its objection decision dated November 1, 2022. In the objection decision, the respondent demanded VAT amounting to Kes 12,982,500. 00. The respondent's demand was based on the following assertions:i.Safaricom Sales Commissions: That commissions earned from the sale of airtime do not constitute exempt supplies envisioned under paragraph 16 Part Il of the First Schedule of the VAT Act and further do not constitute exempt supplies as per the VAT Act, 2013. ii.Discounts allowed but not utilized: That the appellant did not demonstrate that the discounts allowed but not utilized account for exempt supplies.iii.Sales recharge vouchers: That the appellant did not demonstrate that the sales recharge vouchers account for exempt sales.

15. The appellant contended that in 2016 and 2019 it earned commissions from its dealership agreement with Safaricom based on the volumes of sales made from various commodities retailed/owned by Safaricom. These sales commissions would be broken down into three main categories namely; commissions from M-Pesa, commissions from sale of airtime to both prepaid and post-paid customers.

16. The appellant averred that the commissions earned from the sale of airtime to pre-paid and post-paid customers are exempt from VAT. The appellant submitted that in determining whether the said commissions are exempt from VAT, it relied on a directive issued by the Kenya Revenue Authority Domestic Taxes Department (KRA DTD) to Safaricom Limited and Celtel Limited on March 16, 2005. The respondent directed that VAT levied on commissions earned by dealers would stop being levied effective April 1, 2005. As per the ruling, VAT on the mobile cellular phone scratch cards would be charged once at the point of sale by the service providers only. The service providers would account for VAT on the full taxable value of scratch card before allowing for discounts. Further, the directive provides that commissions earned by dealers would be identified as a further discount on the scratch cards and are therefore part of the taxable value of the scratch cards.

17. The appellant assertted that the commissions earned from the sale of airtime to both pre-paid and post-paid customers form part of the taxable value of the scratch cards and are therefore the output VAT is accounted for once by the service provider, Safaricom and not the appellant.

18. That in the financial year 2016, the appellant earned commissions amounting to Kes 66,240,572. 00 for the sale of airtime to pre-paid customers and Kes 3,191,274. 00 for the sale of airtime to post-paid customers. In the financial year 2019, the appellant earned commissions from sale of airtime to both prepaid and postpaid customers amounting to Kes 34,633,544. 00.

19. That in furtherance of business, the Appellant offered various sales discounts on airtime purchased by its regular customers in the FY 2016. Forthwith, it is paramount to appreciate that the accounting treatment then would be a reduction in the sale in the event that the discount is utilized. Consequently, in the event that the discount is not utilized, one would be required to reverse the discount by writing it off therefore recognizing income. Deciphering from the above, the appellant submitted that the amounts of Kes 25,616. 00 forming part of the total income disclosed in the AFS emanates from discounts on sale of airtime, which were written off. Conversely, the reversal of such discounts would be tantamount to a sale of airtime, which is exempt from VAT.

20. That in its submission, the appellant identified one of the issues for determination as:Whether the respondent erred in assessing Value Added Tax (VAT) of Kes 12,982,500. 00 on the variance between sales declared in the Income Tax Returns (IT2C) and the VAT returns without considering exempt sales not declared in the VAT returns by the Appellant.

21. The appellant submitted that it earned commissions from its dealership agreement with Safaricom based on the volumes of sales made from various commodities retailed/owned by Safaricom. These sales commissions would be broken down into three main categories namely; commissions from M-Pesa, commissions from sale of airtime to both prepaid and post-paid customers, and sale of peripheral devices.

22. The appellant submitted that the commissions earned from the sale of airtime to pre-paid and post-paid customers are exempt from VAT. The appellant submitted that in determining whether the said commissions are exempt from VAT, it relied on a directive issued by the Kenya Revenue Authority Domestic Taxes Department (KRA DTD) to Safaricom Limited and Celtel Limited on March 16, 2005. The KRA DTD directed that VAT levied on commissions earned by dealers would stop being levied effective April 1, 2005. As per the ruling, VAT on the mobile cellular phone scratch cards would be charged once at the point of sale by the service providers only. The service providers would account for VAT on the full taxable value of scratch card before allowing for discounts. Further, the directive provides that commissions earned by dealers would be identified as a further discount on the scratch cards and are therefore part of the taxable value of the scratch cards.

23. The Appellant further submitted that the commissions earned from the sale of airtime to both prepaid and post-paid customers form part of the taxable value of the scratch cards and therefore the output VAT is accounted for once by the service provider, Safaricom. It is the Appellant's submission that requiring the Appellant to account VAT on the said commissions would result in double taxation.

Appellant’s Prayers 24. Reasons wherefore the appellant prayed for orders that:a.The respondent's objection decision contained in the letter dated November 1, 2022 confirming the principal VAT assessment amounting to Kes 12,982,500. 00 be set aside in its entirety;b.The appellant sufficiently supported, evidenced and demonstrated full tax compliance in its operations;c.The appeal be allowed; andd.Any other remedies that the honorable tribunal deems just and reasonable.

The Respondent’s Case 25. In response to the appeal, the respondent filed;a.Statement of facts dated January 5, 2023 and filed on January 6, 2023; and,b.Written submissions dated July 14, 2023 and filed on July 27, 2023.

26. The respondent averred that it received intelligence report on or about September 23, 2020 which indicated that the appellant is evading payment of taxes through under declaration of income.

27. Subsequently, the respondent carried out investigations against the appellant which covered the period between July 2015 and June 2020 for corporation tax and Value Added Tax (VAT).

28. The investigations carried out sought to establish the following:a.Ascertain the accuracy and correctness of income as declared in the Corporation tax (IT2C) and VAT (VAT3) returns;b.Whether correct computation and remittances were made for Pay as You Earn (PAYE);c.If there exists a deliberate tax evasion scheme to under declare income;d.Whether the appellant contravened any section of the law with regard to the Tax Procedures Act, 2015 and if so establish the specific offence committed; ande.Assess, demand and collect taxes established from the investigations.

29. In carrying out the investigations, the respondent sought and considered information and documents including the following:a.Appellant's filed tax returns, ledgers and data generated from Jaspersoft for the period under review for analysis;b.Appellant’s registration details (CR12) from the Registrar of Companies; andc.Appellant's copies of bank statements from NCBA and ABSA banks to establish taxable income.

30. The respondent stated that the investigations established that the appellant deals in sale of airtimes, connector packs, mobile phones and accessories, computer equipment and networking accessories.

31. That it established that the appellant operated a Kenyan Shillings’ Bank Account at ABSA bank and a Kenyan Shillings'/US Dollar Bank Account at NCBA bank and requested for appellant's bank statements for the period 2016 to June 2020 and then carried out an analysis of the bank accounts to establish the appellant's business income during the period under review.

32. From the bank statements the respondent analysed all the credits/deposits and adjusted the same for inter-bank transfers, unpaid cheques, VAT output, opening and closing debtors to arrive at the expected sales and communicated the findings to the appellant through a notice of tax assessments issued under section 31 of the Tax Procedures Act.

33. The respondent argued that in response to its letter of July 19, 2022, the appellant wrote a letter dated August 22, 2022 (but received by the respondent on September 2, 2022) objecting to the respondent's assessments meaning that the 60 days contemplated under section 51 (11) of the Tax Procedures Act, 2015 started running on September 2, 2022.

34. The respondent further argued that it considered the grounds raised in the notice of objection, the documentations and further information provided in support of the same and made the following findings:a.Inter-bank transfers 2016-2019i.In the period under review, some inter-bank transfers which the appellant outlined by specific transaction in the bank statements were not factored in the computation of the taxes during the assessment stage leading to overstatement of the taxable income.ii.Upon review of the bank statements against the analysis of the banking at the assessment stage, it was noted that some inter-bank transfers were not adjusted for and the same were adjusted.a.Purchase of USD 2016 and 2017: In the period under review, the appellant availed documents to demonstrate that the variances established were also attributable to the conversion of dollars held in its accounts at the prevailing rates in furtherance of business as follows: Kes 51,858,000. 00 in 2016 and Kes 7,137,307. 60 in 2017. b.Cash transfers from till numbers to the bank;i.In its objection, the appellant availed evidence to support the contention that in the ordinary course of business, the appellant allowed its customers to make payments to its till numbers. Upon accumulation of the funds, the appellant would transfer the same to the appellant’s bank accounts.ii.The sales were also recorded in the appellant's books as sales and thus including the same in the computation of the sales in the banking analysis would amount to double taxation.iii.Upon review of the documents availed, the Respondent noted that the following amounts were transferred from the Appellant's till numbers in the period under review: in 2016 - Kes 16,049,831. 00, Kes 65,347,447 in 2017, Kes 59,132,586 in 2018 and Kes 111,566,069. d.Overstated salaries – 2016i.Pursuant to the provisions of section 22A (1)(c) of the Income Tax Act, cap 470 laws of Kenya, the 5% contribution not in excess of Kes 20,000. 00 is allowable for tax purposes. The amounts in respect to these payments account for Kes 1,205,465. 00 of the variance established at the assessment stage.ii.On the variance in the salaries claimed in the year 2016, the appellant provided evidence in support of the contention that the appellant, as part of the Doshi Group Companies, contributed to shared expenses within the group relating to salaries and wages and other utilities amounting to Kes 547,724. 00. iii.In view of the foregoing, the appellant supported fully the variances established in the salary expenses claimed and as such, the respondent adjusted the same accordingly.

35. The respondent argued that in view of the above, it adjusted the income by Kes 19,684,248. 00 and the corresponding corporation taxes by Kes 21,383,615. 00.

36. The respondent further stated that on reviewing of the VAT assessments, it made the following findings:a.Revenue from the sale of airtimei.Upon review of the documents availed by the appellant, the respondent noted that the sale of airtime is exempt under paragraph 16 of part II of the First Schedule to the Value Added Tax Act, 2013. ii.The respondent made adjustments to exclude the revenues of Kes 22,182,125. 00, Kes 94,945,516. 00 and Kes 115,600,226. 00 for 2016, 2017 and 2018 respectively, attributable to the sale of airtime by the appellant, from the established undeclared sales.

37. Safaricom sales commissions: The respondent noted that commissions earned from Safaricom from the sale of pre-paid and post-paid airtime in the years 2016 and 2019 do not fall under exempt supplies provided for under paragraph 16 of part II of the first schedule to the Value Added Tax Act, 2013. Therefore, the respondent made no adjustments to that effect.

38. Mpesa commissions: The respondent established that the appellant's sales amounting to Kes 465,106. 00 being commissions from transfer services from Safaricom on Mpesa transactions carried out fall under exempt financial services under Paragraph (1) (b) of part ii of the first schedule to the Value Added Tax Act, 2013. Therefore, the respondent excluded the said Kes , 465,106. 00 from the established undeclared sales.

39. Discounts allowed but not utilized: Upon review of the documents availed, the respondent noted that the appellant did not demonstrate that Kes , 25,616. 00 were the discounts allowed but not utilized account for exempted sales and as such no adjustments were made.

40. Consignments outwarda.From the records availed, the respondent noted that the appellant would invoice each of its branches (Mombasa and Eldoret) at the end of the month for the airtime dispatched and the same would be recorded as a sale in the appellant's books once a sale is recorded by the respective branches.b.The Respondent thus established that some variances attributable to the consignments outwards of airtime were exempt under Paragraph 16 of Part II of the First Schedule to the Value Added Tax Act, 2013, Consequently, the Respondent adjusted the undeclared VAT sales to exclude the revenues attributable to the sale of airtime amounting to Kes 22,209,577. 00.

41. Sales recharge vouchers: Upon review of the documents availed, the respondent established that the appellant did not and has not demonstrated that the sales recharge vouchers account for exempted sales and thus the respondent did not make any adjustment relating to the appellant’s alleged discounts worth Kes 22,426,388. 00 offered on the cash sale of airtime.

42. The respondent stated that in view of the above, it adjusted Value Added Tax based on the under declared sales and the corresponding VAT of Kes 12,982,500. 00 and consequently issued its objection decision on November 1, 2022 confirming the tax assessment.

Response to the Appellant’s Grounds of Appeal 43. In response to Grounds No. 1 of the memorandum of appeal, the respondent states that the respondent's VAT additional assessment of Kes 12,982,500. 00 is correct for the following reasons:a.The appellant failed quantify the commissions earned from the Safaricom relating to the sale of pre-paid and post-paid airtime for the years 2016 and 2019. Further, the appellant has failed to prove sufficiently that the alleged commissions are exempt supplies under paragraph 16 of part II of the first schedule to the Value Added Tax Act, 2013. The respondent contends that the alleged commissions do not fall under exempt supplies as per VAT Act, 2013. Therefore, the respondent made no adjustments to that effect.b.The appellant did not demonstrate that Kes 25,616. 00 were the discounts allowed but not utilized and that the same accounted for exempt sales. In the premises, the Respondent did not make adjustments.c.The appellant has not demonstrated that there were discount sales on recharge vouchers and that the same accounted for exempted sales. Therefore, the respondent did not make any adjustment relating to the appellant’s alleged discounts worth Kes 22,426,388. 00 offered on the cash sale of airtime.d.The appellant's reference to and reliance on the respondent's letter dated March 16, 2005 is erroneous because the said letter has become obsolete by operation of law upon repeal of the Value Added Tax Act (cap. 476) by the Value-Added Act, No. 35 of 2013. Therefore, the content of the said letter is of no legal effect.e.The respondent contended and as shown above, it made the necessary adjustments to the appellant's under declared sales based on the submitted documentation and information. Where the appellant proved sufficiently that the sales and income were exempt, the same were excluded, as shown above, in computation of the additional VAT.

44. The respondent reiterated the provisions of section 56 (1) of the Tax Procedures Act, 2015, section 30 of the Tax Appeals Tribunal Act, 2013 and section 107 of the Evidence Act, cap 80 laws of Kenya and stated that the appellant has not proven that the respondent's decision is incorrect. Therefore, the respondent contended that the appellant has not discharged its burden of proof.

45. That the respondent submitted that the appellant's appeal was not supported by documentary proof showing why the respondent's assessment and objection decision is erroneous and the same is without merit and thus ripe for dismissal.

46. The respondent submitted that it conducted investigations on the appellant for the period July 2015 to June 2020 and upon conclusion issued an assessment of Kes 245,825,276. 00 on June 28, 2022.

47. According to the respondent, the following are the issues for determination:i.Whether commissions from sales of Safaricom airtime are VAT exempt;ii.Whether Mpesa commissions are VAT exempt; andiii.Whether the appellant has discharged the burden of proof.

48. On the first issue, the respondent submitted that in arguing that the appellant's commissions from sales of Safaricom Airtime are chargeable to VAT relies on the following grounds:a.The ruling dated March 16, 2005 is obsolete; andb.There is no law that exempt commissions from sales of Safaricom Airtime from VAT.

49. The respondent submitted that the appellant had argued that in determining whether the said commissions are exempt from VAT, it relied on a ruling issued by the Kenya Revenue Authority to Safaricom Limited and Celtel Limited on March 16, 2005;“the Old Cloak.” It is noteworthy to point out to the tribunal that at the time the advisory of March 16, 2005 was issued, Value Added Tax Act, chapter 476 of Laws of Kenya (repealed) was the applicable law.

50. On the assessment and the objection decision; The respondent submitted that the subject matter of the dispute herein covers the period between 2016 and 2020; that is over ten years from March 16, 2005. The respondent's tax decision was issued under the Value Added Tax Act, No. 35 of 2013 — “the New Cloak” which commenced on September 1, 2013 and repealed Value Added Tax Act, chapter 476. Therefore, with the repeal of Value Added Tax Act, Chapter 476, the commissioner's advisory of March 16, 2005 was extinguished by operation of law and thus on September 1, 2013, the commissioner’s advisory ceased to have any legal effect. Consequently, the appellant’s reliance on the advisory of March 16, 2005 is misconceived and without any basis in law.

51. Further, the respondent relied on section 64 (2) of the Tax Procedures Act, 2015, which provides that a ruling is automatically withdrawn upon enactment of a law. The section states:-“64. Withdrawal of a public ruling(1)...(2)Where a law is enacted or the Commissioner makes another public ruling that is inconsistent with an existing public ruling, the existing public ruling shall either be withdrawn or shall be withdrawn to the extent that it is inconsistent with the law or the new public ruling.(3)The withdrawal of a public ruling, in whole or part, shall take effect from—(a)Where subsection (1) applies—(i)The date specified in the notice of withdrawal; or(ii)…(b)Where subsection (2) applies, the commencement date of the law or commencement date of the new public ruling is published.” [Emphasis Added]

52. The respondent submitted that the appellant has stated that it has a dealership agreement with Safaricom for sale of airtime, connector packs, mobile phones and accessories, computer equipment and networking accessories. It therefore follows that the appellant is an agent of Safaricom for the purpose of sale of airtime. From this dealership agreement for sale of airtime (agency), the respondent further submitted that the appellant is paid a commission by Safaricom for the supply of services to Safaricom (sale of airtime to Safaricom’s Customers).

53. In the respondent’s view, there are two transactions involved here: the sale/supply of airtime itself (which is exempt) and the supply of services for sale of airtime (appellant's business activity.)

54. The respondent stated that the appellant argued that commissions earned in the business of sale of airtime to both prepaid and post-paid customers of Safaricom are exempt under paragraph 16 of part il of the first schedule to the Value Added Tax Act, 2013. The section reads:“Part Il – ServicesThe supply of the following services shall be exempt supplies—1 …16. The supply of airtime by any person other than by a provider of cellular mobile telephone services or wireless telephone services...”

55. From the above provisions, the respondent submitted it is clear that supply/sale of airtime is exempt service under paragraph 16 of part ll of the first schedule to the Value Added Tax Act, 2013. However, what is in dispute in the appeal herein is the supply of service for sale of airtime and not the supply of airtime. The Respondent submitted that these are two distinct transactions.

56. The respondent submitted that in that regard the appellant herein earns commissions from the supply of service to Safaricom (business of selling of airtime); which in other words, commission is a consideration for supply of services (sale of airtime.) Therefore, the exemption (under paragraph 16 of part II of the first schedule to the Value Added Tax Act, 2013) targets only the supply of airtime and not the supply of service.

57. The respondent argued that the word “supply” and “supply of services” have been defined under section 2 of the Value Added Tax Act, 2013 as follows:“Supply" means a supply of goods or services;“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;”

58. The respondent submitted that it is not contested that airtime is a “service” and not goods. The respondent urged the tribunal to refer to the decisions in Celtel Uganda Limited v Uganda Revenue Authority, Kampala High Court HCT-00-CC-CA-0001 of 2005 and Ace Distributors Limited v Commissioner General, Tanzania Revenue Authority, Dar Es Salaam Court of Appeal Civil Appeal No. 250 of 2017 where it was held that the supply of airtime is a supply of service.

59. The respondent submitted that since the appellant is offering services (selling of airtime) to Safaricom for a commission, it therefore follows that the appellant is performing a service for another person (Safaricom) which falls within the meaning of supply of service.

60. The respondent having established that other than supplying airtime, the appellant also supplies a service to Safaricom, the respondent sought to establish whether the appellant’s supply is a taxable service. Taxable supply is defined under section 2 of the Value Added Tax Act, 2013 as follows:“taxable supply" means 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;”

61. The respondent submitted that for a supply to be taxable, it has to be in the course or furtherance of a business carried on by the person. The respondent submitted that the appellant has admitted that it is an agent of Safaricom, vide dealership agreement, for the purposes of supplying airtime to Safaricom’s customers. The respondent therefore submitted that it is therefore safe to conclude that the appellants business is supplying Safaricom a service for sale of airtime at a fee and that this fee is known as commission.

62. According to the respondent, the appellant has argued that it is called discount or commission. However, the respondent submitted that fee earned by the appellant is a commission but not a discount and that if it was discount, there will be a reduction of airtime price, which is not the case here. According to the respondent, since there was no reduction of the price of airtime, a claim of double taxation would not arise and thus the appellant’s allegations are unfounded.

63. The respondent relied on the case of MTN Uganda Ltd v Uganda Revenue Authority, Kampala TAT Application No. 8 of 2019, wherein while differentiating commission to a discount, the Ugandan Tax Appeals Tribunal held as follows in its Ruling:“.,. From the illustrations given by the applicant, it sells airtime to the dealer where the commission of the latter is factored in. Therefore, if an airtime card is Shs. 10,000 and the commission is Shs. 2,000 the applicant will sell the card to the dealer at Shs. 8,000. One wonders whether the Shs. 2,000 should be called a discount, when it is actually a commission. A commission and a discount are not one and the same thing. A commission is defined by Black’s Law Dictionary page 327 as “5, A fee paid to an agent or employee for a particular transaction, usually, as a percentage of the money received from the transaction.” A discount is defined by Black’s Law Dictionary (supra) page 564 as “4, A reduction from the full amount or value of something especially, a price.” When a commission is paid to an agent the value of the service is not reduced. The commission is factored in the price of the item or service. When there is a discount on a price, in most cases the commission is reduced accordingly. A discount is therefore not synonymous with a commission.”

64. The respondent averred that, from the above definition, it is evident that the appellant is confusing the discount with commission. The respondent submitted that a discount is not payment whereas a commission is. Therefore, the respondent submitted that the appellant is paid a commission by virtue of being an agent/employee of Safaricom charged with performing a transaction —supplying airtime.

65. Whereas supply of airtime by the appellant is an exempt service, the performance of transaction (supply of service for sale of airtime) for a fee is not. If the Parliament intended to exempt commission paid to the appellant for services rendered to a service provider (Safaricom,) nothing would have prevented the legislature from doing so.

66. The respondent also submitted that the parliament exempted VAT on commission earned on provision of financial service on behalf of another person but not commission on supply of airtime. The respondent requested the Tribunal to refer to paragraph 1 (m) of part Il of the first Schedule to the Value Added Tax Act, 2013 which provide as follows:“Il – ServicesThe supply of the following services shall be exempt supplies—1. The following financial services—(a)...(m)The provision of the above financial services on behalf of another on a commission basis.”

67. The respondent reiterated and invited the tribunal to find that the exemption (under Paragraph 16 of Part Il of the First Schedule to the Value Added Tax Act, 2013) targets only the supply of airtime and not the supply of service relating to supply of airtime. The responded submitted that in arguing for exemption of commissions on sale of airtime, the appellant is overstretching the provisions of VAT Act, 2013 by implying what is not legislated. According to the respondent, this is contrary to the rules of interpretation of tax statutes.

68. The respondent relied on the holding in the celebrated case of Cape Brandy Syndicate v The Commissioner of Inland Revenue CA [1921] 2 KB 403 in Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 others [2019] eKLR where the Court of Appeal held it as a good law. The Court at paragraph 48 held as follows:“48. ... With regard to tax legislation, the language imposing the tax must receive a strict construction. Judge Rowlett in his decision in Cape Brandy Syndicate v LR Commissioners [1921] 1 KB (cited by the appellants), expressed the common law position in this area when he stated;‘In a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used’.... This common law position is what pertains here and has been adopted by our courts as good law. In our view there cannot be an equitable construction of income tax legislation. The norm is that a taxing legislation must be construed with perfect strictness whether or not such construction is against the State or against the person sought to be taxed.”

69. Looking at the provisions of Paragraph 16 of Part Il of the First Schedule to the Value Added Tax Act, 2013, the respondent submitted that the supply of airtime by persons other than service providers is exempted. However, there is no mention of supply of service for sale of airtime. Therefore, according to the respondent, nothing should be read in and nothing is to be implied.

70. Therefore, the respondent submitted that there is no law that exempt VAT from being charged on commission earned from the supply of airtime and that the exemption on supply of airtime does not automatically qualify the exemption of the commission earned from the supply of service to Safaricom/service provider.

ii Whether Mpesa commissions are VAT exempt 71. According to the respondent, the appellant argued that the Mpesa commissions amounting to Kes 34,633,544. 00 is exempt from VAT pursuant to the provisions of paragraph 1 (b) of part Il of the first Schedule to the Value Added Tax Act, 2013.

72. Contrary to the appellant's argument, the respondent argued that Mpesa commission are not exempt under paragraph 1(b) of part Il of the first Schedule to the Value Added Tax Act, 2013. The section reads:“Il – ServicesThe supply of the following services shall be exempt supplies—1. The following financial services—(a)...(b)the issue, transfer, receipt or any other dealing with money, including money transfer services, and accepting over the counter payments of household bills, but excluding the services of carriage of cash, restocking of cash machines, sorting or counting of money, ...”

73. The respondent submitted that for the appellant's commission to qualify as “financial services,” the appellant must satisfy it is a financial institution under section 5 of the Banking Act. The respondent relies on this honourable tribunal’s judgment in Pesapal Limited v Commissioner of Domestic Taxes, Nairobi TAT Appeal No. 13 of 2021 where it was held as follows:-“... The only way through which the appellant could qualify to offer financial service would be if it were to be registered as a financial institution under section 5 of the Banking Act.79. The tribunal reiterates its decision in TAT 760 of 2021, Fivespot Kenya Ltd v Commissioner of Domestic Taxes where it held that the provision of a payment processing system/ platform, licensed under the Central Bank of Kenya, does not amount to the provision of a financial service.80. The tribunal is in the circumstances of the view that the appellant is not a financial service provider as envisaged under the VAT Act and therefore does not qualify for exemption within the context and meaning of sub-paragraph 1(b) or sub-paragraph 1(m) of the paragraph 1 part il of the first schedule to the VAT Act.”

74. The respondent submitted that the appellant has not established that it is registered as a financial institution and thus it services are not financial services for the purposes of paragraph 1(b)&(m) of Part Il of the first Schedule to the Value Added Tax Act, 2013 to qualify for exemption. The commissions should be therefore be charged to VAT.

iii. Whether the Appellant has discharged the Burden of Proof 75. The respondent submitted that the burden of proving that the supply of services is exempt under the Value Added Tax, 2013 is on the Appellant. Section 62 of the Value Added Tax Act, 2013 states as follows:“62. Burden of proof in any civil proceedings under this Act, the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax.”

76. The respondent argued that, it was therefore incumbent upon the appellant to prove that the services in issue were exempt. The respondent maintained that the appellant herein failed to and has not discharged its burden of proving that the services rendered to Safaricom are exempt. The respondent highlighted the following instances for this honourable tribunal’s consideration:-a.Instead of relying on the applicable law (paragraph 16 of Part Il of the first Schedule to the Value Added Tax Act, 2013) to prove that the services rendered are exempt, the appellant had relied on commissioner's Ruling of March 16, 2005 which has since become obsolete. The said ruling was withdrawn under section 64 (2) of the Tax Procedures Act, 2015 and upon repeal of the Value Added Tax, cap 476. b.The appellant has failed to prove that it is a financial institution to qualify for exemption under Paragraph 1 (b) & (m) of part Il of the First Schedule to the Value Added Tax Act, 2013. Therefore, its Mpesa Commissions are ‘subjection to VAT.c.The respondent reviewed the document availed by the appellant and noted that the appellant did not demonstrate that Kes 25,616. 00 were the discounts allowed but not utilized. Similarly, there was no proof that the alleged discounts account for exempted sales and as such, the respondent was not bound to allow any related adjustments.d.Sales recharge vouchers: Upon review of the documents availed, the respondent established that the appellant did not and has not demonstrated that the sales recharge vouchers account for exempted sales and thus the respondent did not make any adjustment relating to the appellant’s alleged discounts worth Kes 22,426,388. 00 offered on the cash sale of airtime.e.The appellant has in this appeal annexed what it called “sales Ledger-Discounts,” bank account statements, Safaricom Statement as Appendixes 9, 8 B and 8 A respectively however, none of these documents speaks as to whether the commissions earned are exempt or not. No such explanation has been given.

77. The Respondent submitted that the appellant has not discharged its burden of proof as required by section 62 of the Value Added Tax Act, 2013, section 56 (1) of the Tax Procedures Act, 2015, section 30 of the Tax Appeals Tribunal Act, 2013 and section 107 of the Evidence Act, cap 80 Laws of Kenya.

78. The respondent, having highlighted the above, prayed that this honourable tribunal: upholds the respondent’s objection decision of November 1, 2022 as valid and in conformity with the provisions of the law and finds that the respondent justified in issuing the assessment.

The Respondent’s Prayers 79. The respondent prayed that the appellant's memorandum of appeal dated December 14, 2022 be dismissed with cost to the respondent for want of merit.

Issues for Determination 80. The Tribunal has carefully studied the parties pleadings and submissions and is of the respectful view that the issues that call for its determination are as hereunder:a.Whether the respondent’s assessment was validly issued; andb.Whether the respondent was justified in confirming the VAT assessment on adjusted vatable sales.

Analysis and Findings 81. The tribunal addresses issues as hereunder: -

a. Whether the Respondent’s assessment was validly issued. 82. Whereas the appellant has not raised this point of law, the tribunal deemed it fit to raise the issue suo moto in the interest of justice.

83. The tribunal has perused the appellant’s assessment dated June 28, 2022 wherein the appellant assessed the responded for the taxes from 2016 to 2020.

84. Section 29 (5) of the Tax Procedures Act provides as follows:‘‘Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.’’

85. Section 31 (4) (b) of the Tax procedures Act provides for the respondent to amend an assessment within five years of the date that the taxpayer submitted the self-assessment return, or for any other assessment, the date the respondent notified the appellant of the assessment.

86. In the instant case, the respondent issued an amended assessment for VAT on June 28, 2022, meaning that the five-year period lies between July 2017 and June 2022. However, the assessment dates back to year 2016 and to June 2017 which are beyond the five years immediately before the last date of the assessment contrary to section 29 (5) and or 31 (4) (b) of the Tax Procedures Act.

87. The only question that remains is whether the respondent had the justification to carry out the assessments beyond the five years. The answer to this question is found under section 29 (6) of the Tax Procedures Act which provides as follows:‘‘Subsection (5) shall not apply in the case of gross or willful neglect, evasion or fraud by a taxpayer.’’

88. This Tribunal in the case of Gitere Kahura Investments Ltd v Commissioner of Investigations and Enforcement Tax Appeal No. 16 of 2019 opined that pursuant to sections 107 and 108 of the Evidence Act, the burden of proof falls upon the respondent who must prove that the appellant’s failure to file returns was motivated by gross or wilful neglect to file returns, attempt to evade paying taxes or fraud by a taxpayer.

89. There is no evidence on record from the respondent attempting to prove that the appellant breached section 29 (6) of the Tax Procedures Act to justify making assessment concerning the 2016 and to June 2017 VAT taxes notwithstanding the five-year limit rule. Therefore, the 2016 and up to June 2017 assessment are statutory time barred therefore, null and void ab initio.

90. Consequently, the Tribunal finds and hold that the respondent’s 2016 and up to June 2017 VAT assessments are statutory time barred and the same are hereby expunged.

b. Whether the Respondent was justified in confirming the VAT assessment on adjusted vatable sales. 91. The appellant argued that the respondent had assessed and confirmed VAT assessment for Kes 12,982,500. 00 being Kes 7,892,779. 00 and Kes 5,089,721. 00 relating to years 2016 and 2019 respectively.

92. The tribunal having found that the respondent had erred in assess for the year 2016 as the same was time barred, it remains for the Tribunal to determine on the assessment relating to the year 2019.

93. The assessment for the year 2019 emanated from a variance between the turnover declared in the appellants VAT return compared to the turnover calculated from the bankings.

94. The respondent thereby brought to charge VAT on the resulting variance of Kes 31,810,755. 00 being Kes 5,089,721. 00.

95. The appellant submitted that it earned a commission from its dealership agreement with Safaricom based on the volumes of sales made from various commodities retailed/owned by Safaricom. These sales commissions would be broken down into three main categories namely; commissions from M-Pesa, commissions from sale of airtime to both prepaid and post-paid customers, and sale of peripheral devices.

96. There from, the appellant submitted that the commissions earned from the operations of M-pesa and the sale of airtime to prepaid and post-paid customers are exempt from VAT. The appellant submitted that this is in fulfilment to the provisions of paragraphs 16 and Paragraph 1 (b) of the First Schedule to the VAT Act.

97. The appellant further submitted that it earned commissions from its dealership agreement with Safaricom based on the volumes of sales made from various commodities retailed/owned by Safaricom. It is the appellant case that commissions from sales of Safaricom airtime are VAT exempt by relying on a directive issued by the Kenya Revenue Authority Domestic Taxes Department (KRA DTD) to Safaricom Limited and Celtel Limited on March 16, 2005. On the other hand, the respondent submitted that the said advisory is obsolete and that the said ruling was withdrawn under section 64 (2) of the Tax Procedures Act, 2015 and upon repeal of the Value Added Tax, Cap 476.

98. The respondent contends it made the necessary adjustments to the appellant's under declared sales based on the submitted documentation and information. Where the appellant proved sufficiently that the sales and income were exempt, the same were excluded in the computation of the additional VAT.

99. The respondent reiterates the provisions of section 56 (1) of the Tax Procedures Act, 2015, section 30 of the Tax Appeals Tribunal Act, 2013 and section 107 of the Evidence Act, cap 80 Laws of Kenya and states that the appellant has not proven that the respondent's decision is incorrect. Therefore, the respondent contends that the Appellant has not discharged its burden of proof.

100. That the respondent submitted that the appellant's appeal was not supported by documentary proof showing why the respondent's assessment and objection decision is erroneous and the same is without merit and thus ripe for dismissal.

101. The tribunal has observed that the appellant has provided documents including bank statements showing monies received from its customers, however there is nothing provided identifying the various amounts of commissions earned from Safaricom in respect of Mpesa transactions fees and dealer commissions that it sought to be exempted in arriving at the Vatable amount that the respondent was bringing to charge in the year 2019.

102. The Tribunal is guided by the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR, where the court held as thus:“Burden of Proof’ at the Tax Court is somewhat unique. At the tax court, a taxpayer is required to disprove an assessment by the commissioner. In other words, a tax payer challenging a tax assessment will need to collect and present evidence in order to disprove the commissioner’s position. This is the basic principle. However, there are some situations where this responsibility or “onus” is reversed. The onus may also shift based on the stage of the proceedings and the actions taken by the parties.

103. Consequently, the tribunal finds and holds that the appellant having failed to prove its case the respondent was justified in confirming the VAT assessment on adjusted vatable sales.

Final Decision 104. The upshot of the foregoing is that the appeal partially succeeds and the tribunal accordingly proceeds to make the following Orders:-a.The appeal is hereby partially allowed.b.The respondent’s objection decision issued on November 1, 2022 is varied in the following terms;i.The assessment on VAT in the sum of Kes 7,892,779. 00 relating to year 2016 be and is hereby set aside.ii.The assessment on VAT in the sum of Kes 5,089,721. 00 relating to the year 2019 be and is hereby upheld.c.Each party to bear its own costs.

105. Orders accordingly.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024. ROBERT MUTUMA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERDR. WALTER ONGETI - MEMBER