[2024] KETAT 1590 (KLR)

Chodari Enterprises Limited v Commissioner of Investigations & Enforcement (Tax Appeal E016 of 2024) [2024] KETAT 1590 (KLR) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1590 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E016 of 2024

E.N Wafula, Chair, AK Kiprotich, G Ogaga & RO Oluoch, Members

November 22, 2024

Between

Chodari Enterprises Limited

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya carrying on the business of wholesale distribution.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, and the Authority is charged with the responsibility of assessing, collecting, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent conducted an audit on the Appellant’s tax affairs and issued additional assessments on 21st and 22nd April 2022 for VAT and Income tax.

4. The Appellant filed a late objection on 29th August 2023 which was accepted by the Respondent on 30th September 2023.

5. The Respondent subsequently issued its objection decision vide a letter dated 25th October 2023.

6. Dissatisfied with the Respondent’s objection decision, the Appellant filed a Notice of Appeal on 24th November 2023.

The Appeal 7. The Appellant’s Memorandum of Appeal dated 22nd December 2023 and filed on 8th January 2024 is premised on the following grounds:i.That the Respondent erred in law and fact by assessing VAT for the years 2017 and 2018 on edible oil consignments which were imported for and on behalf of third parties and were not directly imported by the company for sale.ii.That the Respondent erred in law and fact by assessing Corporation tax for the years 2017 and 2018 on the edible oil consignments which were imported for and on behalf of third parties and were not directly imported by the company for sale.iii.That the Respondent erred in law and fact by assuming that in 2017 and 2018 the Appellant purchased consignments of edible oil of Kshs 130,796,664. 00 from Pan Century Edible Oils, yet such transactions are not reflected in the bank statements.iv.That the Respondent erred in law and fact by arbitrarily using a markup of 21. 7% to calculate the expected sales of the edible oil consignments.v.That the Respondent erred in law and fact by assessing VAT and Corporation tax on the edible oil consignments yet significant risks and rewards were never transferred to the Appellant.vi.That the Respondent erred in law and fact by arbitrarily apportioning banking between income from the sale of rice and income from the sale of edible oil, yet all the banking was in respect of the sale of rice.vii.That the Respondent erred in law and fact by assessing VAT on the wholesale distribution of rice which does not attract VAT as rice is an exempt supply.viii.That the Respondent erred in law and fact by not allowing expenditures wholly and exclusively incurred in the production of that income for the years 2017 to 2020 contrary to Section 15(1) of the Income Tax Act.

Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal;i.The Appellant’s Statement of Facts dated 22nd December 2023 and filed on 8th January 2024 together with the documents attached thereto.ii.The Appellant’s written submissions dated on 8th August 2024.

9. The Appellant stated that the Respondent conducted an investigation audit of the taxpayer's returns for the period January 2017 to December 2020. The tax heads covered were Corporation tax and VAT.

10. That the Respondent carried out import analysis and established the following;Year Quantity CIF Value ImportDuty IDFAmount RDL Total Cost VAT

2017 1,058,040 78,645,829 19,661,458 1,572,921 1,179,686 102,117,934 16,338,869

2018 821,520 52,150,835 13,037,708 1,043,018 782,262 67,835,343 10,853,655

Total 1,879,560 130,796,664 32,699,166 2,615,939 169,953,277 169,953,277 27,192,524

11. That the Respondent carried out a banking analysis of Equity bank statements account number 1560271386667 and calculated the following summary;Particulars 2017 2018 2019 2020 Total

Equity Bank (A/CNo.1560271386667) 146,053,230 313,863,626 4,032,600 607,007 464,566,463

12. That as a result of the investigation audit, the Respondent raised the following additional assessments for VAT and Income tax on 22nd April 2022;Particulars 2017 2018 2019 2020 Total.

Corporation Tax 8,461,798 70,679,424 1,209,780 182,102 80,533,104

VAT 23,368,517 50,218,180 645,216 97,121 74,329,034

Total tax Payable 31,683,315 120,897,604 1,854,996 29,136 154,612,051

13. That the Appellant objected to the assessments on 29th August 2023. The grounds for the late objection were;i.The edible oil was imported for and on behalf of third parties and was not directly imported by the company for sale.ii.The consignment of edible oil did not belong to the company and as such the taxes imposed on the company were erroneous.iii.The principal activity of the company was the wholesale distribution of rice which does not attract VAT as rice is an exempt supply.iv.The Commissioner estimated the cost of purchases of the imported edible oil based on the import data and at the same time matched it with the sale of rice contrary to the provisions of Sections 15 and 16 of the Income Tax Act.

14. That the Respondent accepted the late notice of objection on 30th September 2023.

15. That the Respondent issued an objection decision dated 25th October 2023 rejecting the objection and confirming the following objected tax assessments.Particular 2017 2018 2019 2020 Total

Corporation tax on the sale of edible oil 6,647,877. 60 4,416,080. 70 0 0 11,063,958. 30

Corporation tax on the sale of rice 1,524,211. 20 29,653,714. 20 1,209,780 151,751. 75 32,539,457. 15

VAT payable 3,545,535 2,355,243 0 0 5,900,778

Total taxes due 11,717,623. 80 36,425,037. 90 1,209,780 151,751. 75 49,504,193. 45

16. The Appellant insisted that the Respondent assessed VAT for the years 2017 and 2018 on the edible oil consignments which were imported for and on behalf of third parties and were not directly imported by the company for sale. That since the consignment of edible oil did not belong to the company and as such the taxes imposed on the company were erroneous.

17. The Appellant added that the exporter of these edible oil consignments was Pan Century Edible Oils and the total Customs value was Ksh 130,796,664. 17. To support this argument, the Appellant tabulated the list of the consingments showing the respective dates, Entry numbers, the exporter and CIF value of each consignment.

18. That since the consignments of edible oil belonged to third parties and were not directly imported by the Appellant for sale, the third parties financed the transactions themselves in their bank accounts from where they sent telegraphic transfers to the exporter Pan Century Edible Oils which is based in Pasir Gudang, Malaysia.

19. That the only telegraphic transfer from the Appellant's bank account was a transaction dated 14th December 2017 reference number SWFT: OTT15601072282 Pan Century Edible Oils SD of Ksh 8,551,076. 60

20. That the summary of the telegraphic transfers was as follows;Particular Customs value

Total import value 130,796,664. 17

Less: Telegraphic transfer from theAppellant's bank account (8,551,076. 60)

Telegraphic transfer from third parties 122,245,587. 57

21. The Appellant submitted that the third parties never transferred significant risks and rewards to the Appellant and when the consignment landed at the Port they paid import duties, IDF, RDL, and other landing charges and took possession of edible oil. That hence, the Appellant could not recognize revenue in its books of accounts as the consignments do not belong to it.

22. That the Respondent erred by arbitrarily apportioning banking between income from the sale of rice and income from the sale of edible oil, yet all the banking was in respect of the sale of rice.

23. That the Respondent ought not to have assessed Corporation tax of Kshs 11,063,958. 00 and VAT of Kshs 5,900,778. 00 on the Appellant since the consignments were imported for and on behalf of third parties and were not directly imported by the Appellant for sale.

24. The Appellant stated that the Respondent erred by arbitrarily using a markup of 21. 7% to calculate the expected sales of the edible oil consignments. That however, the actual markup was between 0% to 5% as rice is a first-moving consumer good with low profitability.

25. That the Respondent was also probating and reprobating by allowing the credit side to be income when it is collected in cash. but when expenses are paid in cash they disallow it. That the Appellant questioned why the double standards.

26. That the Respondent in its arbitrary apportionment of income and expenses calculated very high profit margins that are outside the industry usage and practice, especially in first-moving consumer goods that are characterized by low profit margins.

27. That the Respondent calculated a gross profit margin of 23. 33% in 2017, 42. 733% in 2018, 100% in 2019 and 100% in 2020. That rice is a first-moving consumer good with low profitability and the Appellant cannot earn profit margins ranging from 23. 33% to 100% from the industry. That indeed, the industry margins of rice range between 0% to 5%.

28. That the Respondent from the banking analysis indicated a sale of rice of Kshs 4,032,600. 00 in 2019 and Kshs 607,007. 00 in 2020 then subjected Corporation tax on the bank deposits. It averred that it was common knowledge that every deposit in an account is not necessarily income to the account owner.

29. That the Respondent arbitrarily allowed rice purchases but left out significant expenditures wholly and exclusively incurred in the production of that income for the years 2017 to 2020 contrary to Section 15(1) of the Income Tax Act.

30. That Section 23 of the Tax Procedures Act provides that;“23(1)A person shall-(a)maintain any document required under a tax law, in either of the official languages;(b)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

31. That additionally, Section 54A of the Income Tax Act, states;“(1)A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold, and accounts, books, deeds, contracts, and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

32. That the Appellant in compliance with Section 23 of the Tax Procedures Act and Section 54A of the Income Tax Act maintained proper books of accounts. It stated that it submitted to the Respondent the following documents for its tax liability to be readily ascertained:-a.Bank statements for 2017, 2018, 2019 and 2020b.General ledgers for 2017, 2018, 2019 and 2020c.Trial balance for 2017, 2018,2019 and 2020d.Profit or loss extract for 2017, 2018, 2019 and 2020e.Audited financial statements for 2017, 2018 and 2020 with 2019 comparative.

33. That instead of reviewing documents and accurately ascertaining the Appellant's tax liability, the Respondent resorted to the following measures to burden the Appellant with colossal taxes in the name of tax collection;a.Apportionment of income between income from the sale of rice and income from the sale of edible oil on a basis unknown to the International Accounting Standards (IAS).b.Subjecting Corporation tax on bank deposits.c.Assessing taxes for the years 2017 and 2018 on the edible oil consignments which were imported for and on behalf of third parties and were not directly imported by the company for sale.d.Disallowing expenditures wholly and exclusively incurred in the production of that income for the years 2017 to 2020.

Appellant’s Prayers 34. The Appellant prayed that;i.The Respondent's objection decision dated 25th October 2023 be set aside.ii.The costs of this Appeal be awarded to it.iii.Any other remedies that the Tribunal deems just and reasonable.

Respondents Case 35. The Respondent’s case is premised on its Statement of Facts dated and filed on 26th January 2024 together with the documents attached thereto.

36. The Respondent stated that it selected the Appellant for investigations following receipt of information to the effect that the Appellant had made substantial imports in 2017and 2018 yet the Appellant failed to file Corporation tax and VAT returns.

37. That to establish tax compliance, it carried out investigations into the Appellant's affairs by conducting various tests i.e. import analysis, gross mark-up taxable profit estimation based on market survey as well as banking analysis.

38. That in the import data analysis, it established that the Appellant had imported cooking oil as shown in the table below:Year Quantity(kgs) CIF Value ImportDuty IDFAmount RDL Total Cost VAT

2017 1,058,040 78,645,829 19,661,458 1,572,921 1,179,686 102,117,934 16,338,869

2018 821,520 52,150,835 13,037,708 1,043,018 782,262 67,835,343 10,853,655

Total 1,879,560 130,796,664 32,699,166 2,615,939 1,961,948 169,953,277 27,192,524

39. That the established cost of sales (imports) was subjected to a mark-up of 21. 7% to establish the expected sales and the resultant undeclared sales as follows:-

40. That the Respondent analysed the Appellant's bank statements for the Appellant's account held at Equity Bank (A/C No.1560271386667) and below is the summary of the bankings:Particulars 2017 2018 2019 2020 Total

Equity Bank (A/C No.1560271386667) 146,053,230 313,863,626 4,032,600 607,007 464,556,463

41. That the Respondent found that the income established from the mark-up method was compared with the income from the bankings and since the income from the bankings was higher, it deemed the bankings to be the Appellant's income for the period under review.

42. That in view of the above, the Respondent computed the taxes payable as summarized below:Particulars 2017 2018 2019 2020 Total

Corporation Tax 8,461,798 70,679,424 1,209,780 182,102 80,533,104

VAT 23,368,517 50,218,180 645,216 97,121 74,329,034

Total tax Payable 31,683,315 120,897,604 1,854,996 29,136 154,612,051

43. That the Appellant, being aggrieved by the assessments, filed a late objection dated 29th August 2023, which was received on 31st August 2023. That the Respondent, being gracious and magnanimous to the Appellant, allowed the objection on 7th September 2023 after the same was validated.

44. That the Respondent had a phone conversation with the Appellant's taxpayer and even invited them to a meeting so that they could discuss the objection further.

45. That the Respondent considered the Appellant's grounds of objection and canvassed every document that the Appellant provided in making the objection decision.

46. That the Respondent, after thorough canvassing of the objection and documents thereto, amended the assessments to reflect the various concessions that had been approved.

47. That the table below shows the amended assessments:Particulars 2017 2018 2019 2020 Total

Corp tax on thesale of edible oil 6,647,877. 60 4,416,080. 70 11,063,958. 30

Corp tax on thesale of rice 1,524,211. 20 29,653,714. 20 1,209,780 151,751. 75 32,539,457. 15

VAT payable 3,545,535 2,355,243 0 0 5,900,778

Total taxesdue 11,717,623. 80 36,425,037. 90 1,209,780 151,751. 75 49,504,193. 45

48. That the Appellant at the objection stage failed to demonstrate to the satisfaction of the Respondent, that the alleged importation was done on behalf of third parties. It averred that the Respondent, in issuing the default assessment exercised its best judgement per Section 29(1) of the Tax Procedures Act (TPA), and deemed the Appellant's purchases to be for the resale purpose.

49. The Appellant failed to extinguish its burden of proof per Section 56(1) of the TPA, hence the Respondent was within the law in issuing the amended assessment in the objection decision per Section 31 of TPA.

50. That on ground two, the Appellant averred that the Respondent erred in law and fact in assessing Corporation tax for 2017 and 2018 on the edible oil as consignments which were imported for and on behalf of third parties and were not directly imported by the company for sale.

51. The Respondent averred that the Appellant did not prove its case as in the ground one, hence the amended assessment.

52. The Respondent stated that during investigations it used the available information to arrive at the assessments. That the Appellant had failed to demonstrate with evidence after being reminded by the Respondent.

53. The Respondent averred that it invited the Appellant to provide the requisite documents to support its averments. That the Appellant did provide documents however, they-could not fully extinguish its burden as per Section 56 of the TPA, which puts the burden of proof on taxpayers to disprove assessments.

54. Regarding bankings, the Respondent stated that during investigations, it used the available information to arrive at the assessments and objection decision. That the Appellant had failed to demonstrate with evidence after being reminded by the Respondent.

55. The Respondent submitted that it reviewed the Appellant's supporting documents during the objection stage. That every contention and information therein were taken into consideration in establishing the correct tax liability, and the necessary adjustments were made. The Respondent asserted that there were no further adjustments to be made. That the Respondent exercised its best judgment.

56. The Respondent further averred that Section 23 of the TPA requires that the Appellant maintain tax records and Section 24(1) of the TPA requires that the Appellant produce such records when required by the Respondent.

57. That the Appellant failed to produce documents that would prove that it indeed incurred the expenses, hence failing to extinguish its burden of proof.

58. The Respondent stated that from the facts outlined, the laws as they provide and the arguments presented, the Appellant had failed to prove its case hence this Appeal fails and should be dismissed.

Respondent’s Prayer 59. The Respondent prayed to the Tribunal;a.To dismiss the Appeal.b.Uphold the Respondent’s objection decision dated 25th October 2023. c.Award the Respondent the costs of the Appeal.

Issue For Determination 60. The Tribunal frames the issue for determination to be:Whether the Respondent’s objection decision was justified.

Analysis And Findings 61. The Tribunal having appropriately ascertained the issue that falls for its determination shall proceed to make analysis as hereunder.

62. The genesis of this dispute is the Respondent’s additional assessments for VAT and Corporation tax raised on 21st and 22nd April 2022.

63. It was the Appellant’s contention that the Respondent assessed VAT for the years 2017 and 2018 on the edible oil consignments which were imported for and on behalf of third parties and were not directly imported by the company for sale. That since the consignment of edible oil did not belong to the company and as such the taxes imposed on the company were erroneous.

64. The Appellant submitted that the third parties never transferred significant risks and rewards to the Appellant and when the consignment landed at the Port they paid import duties, IDF, RDL, and other landing charges and took possession of edible oil. That hence, the Appellant could not recognize revenue in its books of accounts as the consignments do not belong to it.

65. That the Respondent erred by arbitrarily apportioning banking between income from the sale of rice and income from the sale of edible oil, yet all the banking was in respect of the sale of rice.

66. That the Respondent ought not to have assessed Corporation tax of Kshs 11,063,958. 00 and VAT of Kshs 5,900,778. 00 on the Appellant since the consignments were imported for and on behalf of third parties and were not directly imported by the Appellant for sale.

67. The Respondent on its part submitted that the Appellant at the objection stage, failed to demonstrate to the satisfaction of the Respondent, that the alleged importation was done on behalf of third parties. It averred that the Respondent, in issuing the default assessment exercised its best judgement per Section 29(1) of the Tax Procedures Act (TPA), and deemed the Appellant's purchases to be for the resale purpose.

68. That the Appellant failed to extinguish its burden of proof per Section 56(1) of the TPA, hence the Respondent was within the law in issuing the amended assessment in the objection decision per Section 31 of TPA.

69. At the center of the Appellant’s arguments was that the imported edible oil consignments that the Respondent is subjecting to tax, were consignments done on behalf of third parties and not its own. The Tribunal notes that the main issue in this dispute is whether the Appellant provided sufficient documents in support of its objection and arguments in this Appeal.

70. From the objection decision the Tribunal notes that where costs were properly supported, the Respondent made adjustments of the taxes payable prior to issuing the final decision.

71. The Respondent was however consistent in its Statement of Facts and the objection decision that the Appellant failed to provide documents and information to fully support its objection.

72. The Tribunal has perused through the documents presented by the Appellant and notes that apart from providing the list of the consignments in question, it did not provide any evidence to demonstrate the actual owners of the edible oil consignments in question and their relationship with the Appellant.

73. It is the view of the Tribunal that the Appellant ought to have provided the documents to fully support its objection and this Appeal, failure to which means its arguments remain mere averments.

74. The provision of documents as evidence is well stated under Section 30 of the Tax Appeals Tribunal Act which provides as thus:-“In a proceeding before the Tribunal, the appellant has the burden of proving –a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

75. The Tribunal is of the view that the Appellant failed to meet the obligation placed on it under Section 30 of the Tax Appeals Tribunal Act to discharge its burden of proof by providing supporting documents.

76. The Tribunal reiterates its decision in TAT 1296 of 2022 James Finlay (kenya) Limited Vs Commissioner Legal Services And Board Coordination where it held as follows at paragraph 83;“In the instant case the Tribunal found that the Appellant failed to address the specific documents mentioned by the Respondent in the objection decision and therefore failed to discharge the burden of proof.”

77. Consequently, the Tribunal finds that the Appellant failed to discharge the burden of proof placed upon it in demonstrating that the Respondent erred in confirming the assessments in relation to Corporation tax and VAT and therefore the Objection decision was justified.

Final Decision 78. On the basis of the foregoing analysis the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following final orders:-i.The Appeal be and is hereby dismissed.ii.The Respondent’s objection decision dated 25th October 2023 be and is hereby upheld.iii.Each party to bear its own costs.

79. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22NDDAY OF NOVEMBER, 2024. ERIC NYONGESA WAFULA - CHAIRMANABRAHAM KIPROTICH-MEMBERGLORIA A OGAGA -MEMBERDR. RODNEY O. OLUOCH-MEMBER