[2023] KETAT 330 (KLR)

Chershire Freight Limited v Commissioner of Legal Services and Board Coordination (Appeal 525 of 2022) [2023] KETAT 330 (KLR) (Civ) (2 June 2023) (Judgment)

Neutral citation: [2023] KETAT 330 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 525 of 2022

Robert M. Mutuma, Chair, E.N Njeru, Rodney Odhiambo Oluoch & D.K Ngala, Members

June 2, 2023

Between

Chershire Freight Limited

Appellant

and

Commissioner of Legal Services And Board Coordination

Respondent

Judgment

Backgroung 1. The appellant is a limited liability company that carries on the business of clearing and forwarding, transport and warehousing.

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 Part 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 dispute in this Appeal arose when the respondent carried out a review of the appellant’s VAT and Income tax returns for the years of income 2017 to 2019 and noted that the Appellant had allegedly under declared VAT sales for the said years of income.

3. The respondent subsequently issued additional assessment against the appellant on November 4, 2020 for the sum of Kshs 3,319,976. 00.

4. The appellant objected the respondent’s assessment on November 23, 2020.

5. The respondent subsequently issued the appellant with an invalidation notice on the premise that it had failed to support its objection with documents.

6. The appellant being dissatisfied with the respondent’s objection decision lodged the instant Appeal at the Tribunal on May 24, 2022 seeking prayers that the Tribunal sets aside the confirmed assessments.

The Appeal 5. The appellant’s Memorandum of Appeal which was filed in the format of a formal letter and dated the May 13, 2022 and presented herein in its verbatim was premised on the following grounds:a.That our company is a small firm involved in clearing, forwarding, warehousing and packing of goods on behalf of various clients. We receive total cash amounts which include Clients’ advances and payments for our services/agency fees.b.That your additional assessments are erroneous in our view as it attempts to charge VAT on all the total cash amounts received by ourselves whereby over 97% is advance amounts owed to our clients for respective payment on their behalf to respective government agencies including yourselves as per nature of our business.c.That the only amounts which we consider as revenue is the agency fee for our services which attracts VAT and we have been paying the same as per the respective VAT3 returns. The amounts demanded do not relate to VAT on services and would render our business insolvent.d.That the amounts indicated as Sales (as per IT2C return) are actually total amounts received from various clients’ proportion being amounts advanced by our clients to facilitate the clearing process.e.That we acknowledge our accounts team erred in making the income tax returns, being a small firm with outsourced administrative staff the same was not picked by our directors.f.That you have not considered the documents provided by us including, copies of bank statements for the periods, original copies of the invoice books, an analysis of amounts received from clients and VAT returns.g.That we confirm that we have made correct VAT returns and paid the correct VAT amounts due on invoices to the best of our abilities but as a small firm we require your support in strengthening our administrative compliance.h.That you have not considered our various direct representations to your officers on the same.

Appelant’s Case 6. The appellant filed a Statement of Facts dated May 13, 2022 where it explained the history of this tax dispute and affirmed that it had provided the respondent with all the relevant documents related to this Appeal. Its view therefore, was that the subject matter assessment was erroneous and excessive.

7. The appellant’s prayer to the Tribunal was for orders that:i.All the evidence it has presented be considered in order that this issue can be solved amicably.ii.The respondent’s additional assessments be considered erroneous and be set aside or amended accordingly.

Respondent’s Case 8. The respondent has set out its response to the appellant ‘s case in the Statement of Facts filed on July 1, 2022 and Written Submissions filed on January 13, 2023.

9. The Respondent averred that appellant’s objection did not meet the threshold stipulated under section 51 (3) of the Tax Procedures Act. Specifically, the objection did not state precisely the grounds of objection nor adduce evidence and /or documents in support of the objection. That section 51(3) (c) of the Tax Procedure Act 2015 states as follows:-“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-(c)All the relevant documents relating to the objection have been submitted”.1. The respondent stated that the appellant has not provided any additional evidence to show that the Respondent’s confirmed assessment was wrong and therefore the Appeal herein is devoid of any merit.2. It argued further that the appellant ought to have provided evidence to prove that the money it received was inclusive of disbursements to third parties by providing a breakdown of the income declared in the audited accounts in terms of the amount paid, to whom it was paid and the purpose of the payments. Such amounts would also be referenced in the bank statements and sales invoices. In the absence of such segmentation between the disbursement and agency fee, the Respondent was right in confirming the assessments.3. The respondent stated that the appellant’s averments are not supported by evidence.4. The respondent prayed that this honourable tribunal:i.Upholds the respondent’s decision invalidating the appellant’s objection notice as proper in law and in conformity with the provisions of the VAT Act, 2013 and the Tax Procedures Act.ii.That this Appeal be dismissed with costs to the respondent as the same is devoid of any merit

Issues for Determination 10. The Tribunal having carefully considered the pleadings filed, evidence adduced and submissions made by the parties is of the considered view that the Appeal herein crystalizes into a single issue for determination;Whether the Respondent tax assessment was justified.

Analysis and Determination. Whether the Respondent tax assessment was justified. 11. The appellant objected to the additional assessments vide a letter dated November 11, 2020. The respondent stamped the said objection letter to confirm receipt on the same day. On its part, the respondent invalidated the said objection on the 12th of May 2021. The invalidation notice was issued about 6 months after the receipt of the notice of objection.

12. The law that guides the respondent on how to respond to objections by taxpayers is section 51(11) of theTPA(2021 version) which provides as follows:“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

13. The respondent was thus obliged to respond to the appellant’s objection on or before the 10th of January 2021. As it is, the current Invalidation decision was late by about 4 months. This is too long a period and no explanation and or justification whatsoever has been provided for this laches.

14. The outcome of the foregoing analysis is that the respondent’s invalidation notice is invalid for contravening the express provision of section 51(11) of the TPA.

Final Decision 15. The upshot of the foregoing is that the Appeal succeeds and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s Invalidation decision dated the 12th of May 2021 be and is hereby set aside.c.Each party to bear its own costs.

16. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF JUNE 2023. ...................................ROBERT M. MUTUMACHAIRPERSON.................................ELISHAH N. NJERUMEMBER.................................RODNEY O. OLUOCHMEMBER.....................................DELILAH K. NGALAMEMBER.