[2024] KETAT 108 (KLR)

Chryso Eastern Africa Limited v Commissioner of Domestic Taxes (Appeal 1441 of 2022) [2024] KETAT 108 (KLR) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 108 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1441 of 2022

E.N Wafula, Chair, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich, E Ng'ang'a & B Gitari, Members

February 2, 2024

Between

Chryso Eastern Africa Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered under the Company’s Act 2015, Registration Number CPR/2015/189777. It carries on business of manufacturing, transforming and marketing of admixtures and additives of construction industries.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority 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 dispute arose when on 6th May 2021 the Respondent sent the Appellant desk returns review findings for the period January 2017 to December 2019.

4. Subsequently the Respondent issued a tax demand notice dated 2nd June 2022 delivered by email.

5. In the demand notice of additional assessment, the Respondent indicated the following items: -i.The variance between sales as per the ledgers and sales declared on iT2C, purchases as per VAT 3 against purchases as per iT2C and disallowed expenses amounting to Ksh. 88,488,042. 00ii.Subjected VAT on (expected sales) amounting to Ksh. 6,259,633. 00iii.Withholding tax on foreign loans, consultancy and professional fees amounting to Kshs 2,493, 329. 00

6. The Appellant filed a notice of objection to the assessment on 1st July 2022 via iTax portal in which it shared with the Respondent all the supporting documents and also paid taxes not in dispute in compliance with Section 51(3) of Tax Procedure Act.

7. The Respondent issued an invalidation notice on 15th July 2022 and the Appellant responded on 15th August 2022.

8. The Respondent issued its objection decision on 13th October 2022 via email in which it confirmed the assessment of Kshs 97,241,004. 00 for the period January 2016 to December 2020.

9. The Appellant, being dissatisfied with the objection decision of the Respondent dated 13th October 2022 filed a Notice of Appeal dated 8th November 2022 and filed on 11th November 2022.

The Appeal 10. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 25th November 2022 and filed on the same date:-a.That the Respondent erred in law by imposing income tax on an approach that contravenes the applicable Sections of the Income Tax Act ('ITA"), international instructions, best practices and Kenyan jurisprudence.b.That the Respondent erred and contravened the provisions of Section 17 of the VAT Act 2013 by charging Value Added Tax (VAT) on variances between IT2 and VAT returns filed on iTax.c.That in computing the tax liability, the Respondent brought to charge the following:i.The variance between sales as per ledgers and sales declared for VAT, purchases as per VAT3 against purchases as per IT2C and disallowed expenses amounting to Kshs 88,488. 042. 00ii.Subjected VAT on “expected sales" amounting to Kshs 6,259,633. 00iii.Withholding taxes on foreign loans, consultancy and professional fees amounting to Kshs 2,493,329. 00

Appellant’s Case 11. The Appellant’s case is premised on the following documents:-a.The Appellant’s Statement of Facts dated and filed on 25th November 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated and filed on the 9th August 2023 together with the authorities attached thereto.

12. The Appellant stated that on the Corporation tax -Year 2016, the Respondent disregarded the reconciliations provided between the sales declared for VAT and the general ledger sales. The Appellant also stated that the income tax purchases declared were readjusted with the VAT purchases declared for the year. Further, the Respondent disallowed some expenses adjusting the taxable income to Kshs 77,849,143. 30 resulting to corporate tax charge of Kshs 23,354,743. 00.

13. On Corporation tax-year 2017, the Appellant stated that the Respondent disallowed some expenses adjusting the taxable income to Kshs 12,108,960. 00 resulting to Corporate tax charge of Kshs 3,632,688. 00

14. The Appellant stated that on Corporation tax-year 2018, the Respondent disregarded the reconciliations provided between the sales declared for VAT and the general ledger sales. Also, the income tax purchases declared were readjusted with the VAT purchases declared for the year. Further, the Respondent disallowed some expenses adjusting the taxable income to Kshs 64,206,006. 67 resulting to Corporate tax charge of Kshs 19,261,802. 00

15. On the Corporation tax-year 2019, the Appellant stated that the Respondent disregarded the reconciliations provided between the sales declared for VAT and the general ledger sales. Also, that the income tax purchases declared were readjusted with the VAT purchases declared for the year. Further, the Respondent disallowed some expenses adjusting the taxable income to Kshs 100,632,386. 67 resulting to Corporate tax charge of Kshs 30,189,716. 00

16. On the Corporation tax-year 2020, the Appellant stated that the Respondent disregarded the reconciliations provided between the individual customer ledgers and the general ledger. Also, the income tax purchases declared were readjusted with the VAT purchases declared for the year. Further, the Respondent disallowed some expenses adjusting the taxable income to Kshs 41,171,383. 00 resulting to Corporate tax charge of Kshs 12,049,095. 00

17. The Appellant stated that on Value Added Tax, the Respondent compared the purchases declared for Corporation taxes and the purchases declared for input VAT, and the variance was subjected to VAT amounting to Kshs 5,129,989. 00 for the year 2017,

18. That the Respondent compared the 2019 general ledger sales and the VAT3 sales and then calculated VAT on the variance amounting to Kshs 1,129,643. 00 VAT payable.

19. On the Withholding taxes, the Appellant stated that the Respondent assessed withholding taxes on professional fees, consultancy and withholding tax on interest on foreign loans amounting to Kshs 2,493,329. 00

20. The Appellant also stated that it agreed to the assessed withholding taxes and settled them in full at the time of lodging the objection and annexed payment registration numbers.

21. The Appellant stated that on the Corporation tax, the Respondent contravened Section 15 of the Income Tax Act by disallowing the expenses claimed in the income tax return.

22. It is the Appellant’s statement that the disallowed expenses were wholly and exclusively incurred in furtherance of Chryso Eastern Africa Limited business.

23. The Appellant stated that it had appointed imports clearing agent, Bollore Logistics Kenya Limited who cleared supplies in transit to other East Africa clients.

24. The Appellant claimed that it had provided all the reconciliations and documentary evidence for the sales cleared by the Bollore Logistics Kenya Limited.

25. It is the Appellant’s assertion that it also provided invoices, local purchase order, bill of lading and commercial invoices for the triangular sales.

26. The Appellant further stated that it provided the proof of payment of the withholding taxes not disputed.

27. The Appellant stated that it attached what it called the reconciliations between the general ledger sales and revenue in the audited financial statements.

28. That the Appellant stated further that as per Value Added Tax (VAT) Act, 2013, Section 17, it provided all the following documents required to the Respondent during the objection stage:a.An original tax invoice issued for the supply or a certified copy thereof.b.Customs entry duly certified by the proper officer and a receipt for the payment of tax.c.A customs receipt and a certificate signed by the proper officer stating the amount of tax paid in the case ofd.Goods purchased at a customs auction.e.A credit note.f.A debit note.

29. That the Appellant provided during the objection stage, all the documentation to the Respondent, as required by the VAT Act 2013. The Appellant appended copies of the invoices to this Appeal.

30. The Appellant stated that the Respondent erred the VAT 2013 by calculating VAT on supplies outside the VAT scope (triangular sales) and supplies cleared in the name of the clearing agent.

31. That the Appellant's input tax was properly supported and was thus legally claimable under Section 17 of the VAT Act.

32. That the Respondent erred in disregarding the clear and unambiguous provisions of the VAT Act which provide for the deduction of input tax.

33. The Appellant submitted that on the 2nd June 2022, the Respondent issued it with an additional assessment seeking to recover Corporate tax of Kshs 88,488,042. 00 and Value Added Tax of Kshs 6,259,633. 00, totaling to the tax arrears to Kshs 97,241,004. 00

34. The Appellant averred that through its tax representatives it objected to the assessment through its objection letter dated 01 July 2022 stating that:a.As for Income tax and VAT variances, the Appellant declared all local and exported supplies for VAT and taxes thereon paid. Further, the Appellant’s invoices were dominated by foreign currency and the translation rates differ from VAT resulting to the variance.b.As for purchases, Income tax Versus Value Added Tax, triangular sales resulting from supplies made directly to customers in other jurisdictions without landing on the Kenyan soil.c.As for disallowed expenses, the Appellant provided support of the allowed expenses for income tax.

35. That against this background the Appellant seeks a sound and Solomonic determination from the Tribunal.

36. In addition, the Appellant further submitted the following as the issues for determination.i.Whether the Respondent erred in law and fact in charging Value Added Tax on variances between IT2C and VAT returns filed on ITax.ii.Whether the Respondent erred in law by charging Corporate tax on 'expected sales' in an approach that contravenes the applicable sections of the Income Tax Act.iii.Whether the Respondent erred in law and fact by disallowing expenses contrary to the provisions of Section 15 of the Income Tax Act.

37. The Appellant submitted on the issues set out above as follows:i.Whether the Respondent erred in law and fact in charging VAT and corporate tax on VARIANCES between purchases on the ledger and purchases declared for VAT.

38. The Appellant submitted it carries out business of manufacturing, transforming, and marketing of admixtures and additives of construction materials.

39. That the products are imported from South Africa to Kenya for reselling to it respective clients in East Africa.

40. The Appellant’s submitted that the triangular sales do not fall within the scope of the VAT supplies.

41. The Appellant averred that it has appointed imports clearing agent, Bollore Logistics Limited who clears supplies in transit to other East Africa clients.

42. The Appellant referred the Tribunal to Section 17of the Value Add Tax Act, which states:-“(1) Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1) –(a)the person does not hold the documentation referred to in subsection (3), and(b)the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation: Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.(3)The documentation for the purposes of subsection (2) shall be—a.an original tax invoice issued for the supply or a certified copy;b.a customs entry duly certified by the proper officer and a receipt for the payment of tax;c.a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction; andd.a credit note in the case of input tax deducted under section 16(2);e.a debit note in the case of input tax deducted under section 16(5);ii.Whether the Respondent erred in law by charging Corporate tax on 'expected sales' in an approach that contravenes the applicable sections of the Income Tax Act.

43. The Appellant submitted that in the years 2015 and 2016, it was not registered in Kenya, supplies were made to East Africa.

44. It submitted that it provided invoices, local purchases order, bill of lading and commercial invoices for the supplies in transit to other East Africa Countries.

45. The Appellant submitted that it provided all the reconciliations and documentary evidence for the sales cleared by the Bollore Logistics Kenya Limited.

46. While conceding that supplies were made to Kenya, the Appellant submitted that the clearing agent, Bollore Logistics Limited, cleared the goods in their name and used their Pin Identification Number. For such cases the Appellant declared the sale for income for Corporate taxes.

47. The Appellant submitted that for the cases where for goods supplied to Kenya and cleared in the name of its clearing agent, it declared the sale for income for Corporate taxes.

48. It is the Appellant’s submission that supplies cleared in Bollore Logistics Limited are not declared VAT in the respective periods.

49. The Appellant also submitted that some purchases were time barred and were not declared for VAT.

50. The Appellant, in support of the above, referred the Tribunal to Section 17of VAT Act, which states:-“(1)Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), (a) the person does not hold the documentation referred to in subsection (3), or(b)the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”iii.Whether the Respondent erred in law and fact by disallowing expenses contrary to the provisions of Section 15 of the Income Tax Act.

51. The Appellant submitted that the Respondent disallowed some expenses wholly and exclusively incurred in production of income despite it providing all the support for the expenses allowed for Corporate tax.

52. The Appellant submitted that it demonstrated the connection to the income-earning operations of the Appellant to render the expenses deductible.

53. In support of the above submissions, the Appellant cited the case of Commissioner for Inland Revenue v Genn & Co (Pty)Ltd where the Honourable Tribunal pronounced itself as below: where it was stated that;“In deciding how the expenditure should properly be regarded the court has to assess the closeness of the connection between the expenditure and the income earning operations, having regard both to the purpose of the expenditure and to what it actually effects."

54. The Appellant further submitted that in consequence, Section 15(1) of the Income Tax Act analyses what is deductible in ascertaining the total income as follows:“(1)For the purpose of ascertaining the total income of a person for a year of income there shall, subject to section 16, be deducted all expenditure incurred in that year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under section 27 any income of an accounting period ending on some day other than the last day of that year of income is, for the purpose of ascertaining total income for a year of income, taken to be income for a year of income, then the expenditure incurred during that period shall be treated as having been incurred during that year of income.

55. The Appellant further submitted that Section 30 of the Tax Appeals Tribunal Act places the burden of proof on the taxpayer to submit all the necessary documentation to support its case. In support of this, it cited decision of Court in Metcash Trading Limited -vs Commissioner for the South African Revenue Service and Another Case CCT 3/2000, where it was held that:“But the burden of proving the Commissioner wrong then rests on the vendor under section37. Because VAT is inherently a system of self-assessment based on a vendor's own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or Appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner; and by like token such a finding would usually have entailed a rejection of the truth of the vendor's records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment: unless the Commissioner's precipitating credibility finding can be shown to be wrong, the consequential assessment must stand."

56. The Appellant further cited that case of Hickman Motors Ltd. v. Canada,[1997] 2 S.C.R.336, to submit that if the taxpayer adduces evidence that discharges his burden, the burden shifts to the Commissioner who must demolish such evidence. According to the Appellant, the court stated in the above case that:- “The taxpayer's initial onus of “demolishing” the Minister's exact assumptions is met where the appellant makes out at least prima facie case...Where the Minister's assumptions have been “demolished by the appellant, “the onus.... shifts to the Minister to rebut the prima case" made out by the appellant and to prove the assumptions..The law is settled that unchallenged and uncontradicted evidence “demolishes" the Minister's assumptions; ...Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed; and even if the evidence contained “gaps in logic, chronology, and substance", the taxpayer's Appeal will be allowed if the Minister fails to present any evidence as to the source of income.”

57. It is the Appellant’s submissions that it had provided proof of payment of the withholding taxes not disputed.

Appellant’s Prayers 58. The Appellant pleaded that the Tribunal finds that:i.The Appellant has sufficiently supported the variance between the 'expected sales' and sales as reported in the income tax returns and the reconciling items are accurate and verifiableii.The Appellant has sufficiently supported the triangular sales.iii.The Appellant has sufficiently and accurately reconciled the imports cleared in the name of the clearing agent.iv.The withholding taxes assessed have been paid in full.v.The Tribunal allows the Appeal and set aside the additional assessments amounting to Kshs 97,241,004. 00 as issued by the Respondent.

Respondent’s Case 58. The Respondent’s case was premised on its Statement of Facts dated 28th December 2022 and filed on the same date.

59. According to the Respondent, On 6th May 2021, the Respondent sent to the Appellant desk returns review findings for the period January 2017 to December 2019.

60. That on 2nd June 2022, the Respondent issued additional assessments and forwarded them to the Appellant.

61. That the Appellant lodged Objection Applications on 2nd and 3rd July 2022.

62. The Respondent stated that it issued an invalidation notice dated 15th July 2022 which was responded to by the Appellant on 15th August 2022 and it issued its objection decision on 13th October, 2022.

63. The Respondent stated that it carried out an audit for the years 2017-2020 and a letter of assessment issued. The assessments are as summarized below:-

Tax Head 2016 2017 2018 2019 2020 Total

Corp Tax 23,354,743 3,632,688 19,261,802 30,189,716 12,049,095 88,488,042

VAT - 5,129,989 - 1,129,643 - 6,259,633

WHT 108,361 341,359 664,722 671,406 707,481 2,493,329

Total Principal Tax 23,463,104 9,104,036 19,926,524 31,990,765 12,756,575 97,241,004 Customer ledger (Export sales) 2020

Cimerwa 40,580,512

Hima 56,949,688

Hino 7,573,467

Total Exports per customer ledgers 105,103,667

Exports per GL RECON 72,735,117

Undeclared IT sales 32,368,550 64. The Respondent stated that in the year of income 2020, the Respondent established that as per the Appellant's ledgers provided, the export sales were higher than the export sales per the general ledger reconciliation. According to Respondent, the variance illustrated below constituted the undeclared sales and was charged to Corporation tax;-

65. That in the year 2019, the general rated sales per the general ledger provided were higher than the general rated sales declared in the VAT 3 returns and that the variance was charged to VAT at 16%;

Year 2019

General rated sales per VAT 3 78,724,333. 00

General rated sales GL RECON 85,784,604. 00

Undeclared General rated sales 7,060,271. 00 66. The Respondent stated that in the financial statements, the Appellant did not disclose the purchases made in the years under review. According to the Respondent, opening stock of Kshs. 14,994,741. 00 in 2016 was declared, but the Appellant did not demonstrate how they arrived at it yet the company started in mid-2015 whereby a NIL return was filed.

67. That the cost of sales and the opening and closing stock balances were worked out to come up with the purchases made in the years as illustrated below;- The Respondent stated that the income tax purchases and expenses attracting VAT vs VAT purchases claimed were analysed and variances established are as illustrated below;-Year 2016 2017 2018 2019 2020

Opening balance - 44,253,154 68,724,741 66,119,440 71,464,454

Closing balance per FS 44,253,154 68,724,741 66,119,440 71,464,454 64,717,019

COS claimed per FS 70,733,140 126,037,888 147,582,774 109,434,513 76,047,563

Purchases 114,986,294 150,509,475 144,977,473 114,779,527 69,300,128

68. In view of the above, the Respondent stated that the variances illustrated below remained unreconciled and they were brought to charge for both Corporation tax and VAT:-Year 2016 2017 2018 2019 2020

purchases 114,986,294 150,509,475 144,977,473 114,779,527 69,300,128

Rental expense 4,539,463 3,497,812 3,735,000 4,182,482 1,576,456

Warehouse rent 3,211,522 7,831,683 8,100,819 8,362,231 6,716,299

Carriage outwards Domestic 5,112,085 642,362 1,002,500 1,144,980 931,877

Production 4,786,047 3,754,423

Rent on leasehold of assets/equipment hire 2,217,204

Audit 361200 315000

Professional fees 747,421 1,185,772 1,109,370

Accounting 1,806,025 725,587

consultancy 1,797,115

Equipment Hire 1,881,991 1,634,678

Total IT purchases attracting VAT 130,016,589 164,269,341 159,001,564 138,468,832 85,710,976

Less IDF & RDL-NOT subjected to VAT - 3,466,387 1,234,012 1,791,746 996,936

IT purchases attracting VAT (a) 130,016,589 160,802,954 157,767,552 136,672,086 84,714,040

VAT purchases (b) 21,259,886 189,368,213 83,879,897 75,824,567 62,141,275

Less VAT purchases 2015 1,170,689

Variance (a-b) 107,586,014 (28,565,259) 73,887,656 60,847,519 22,572,764

Over claimed purchases/expenses for IT 107,586,014 73,887,656 60,847,519 22,572,764

Over claimed input tax (28,565,259)

Reconciliation

Notable expenses claimed in subsequent years 1,980,706 5,477,879 3,877,509 24,202 35,000

105,605,308 32,062,432 75,488,026 64,700,826 22,561,966

Over claimed purchases/expenses for IT 105,605,308 75,488,026 64,700,826 22,561,966

Over claimed input tax (32,062,432)

69. According to the Respondent’ Statement of Facts, some expenses claimed under the employment costs were not supported and some did not qualify for deduction. The Respondent presented the analysis as below:-

Year 2016 2017 2018 2019 2020

Relocation fees 610,929 4,334,727 1,232,479

Exceptional expense 1,109,370 4,476,168

CEA salaries 7,870,606

Salaries ADM 280,737

Bonus provision 4,793,752

Reallocation costs 1,112,255

Leave provision 1,757,081

Chryso SA 766,404 70. The Respondent further stated that it established that the Appellant received a loan from its parent company Chryso South Africa and paid loan interest However, it did not withhold and remit withholding tax.

71. Further, the Respondent stated that the Appellant engaged professionals but never remitted withholding tax as well. The Respondent stated it computed the WHT as illustrated below:-

Year 2016 2017 2018 2019 2020 Total

Foreign interest paid 1,819,726 4,059,555 4,106,250 4,117,500

WHT @15% 272,959 608,933 615,938 617,625

Accounting 1,806,025 725,587

Audit 361,200 315,000

Professional fees 747,421 1,185,772 1,109,370

consultancy 1,797,115

WHT @ 5% 108,361 89,400 59,289 55,469 89,856

Total WHT 108,361 362,359 668,222 671,406 707,481

WHT paid 21,000 3. 500

WHT due 108,361 341,359 664,722 671,406 707,481 2,493,329 72. The Respondent stated that it refutes each and every allegation by the Appellant in the Memorandum of Appeal and statement of Facts.

73. On the issue of under declared income tax sales the Respondent averred that some elements of local sales and transportation fees were captured in the export customer's ledger but could not be substantiated by any supportive documents.

74. The Respondent stated that on the underdeclared VAT general rated sales save for an explanation that the variance related to application of different translation rates in the books of accounts and the VAT returns, the Appellant could not support this with documentary evidence.

75. The Respondent reiterated that the purchases that relate to sales that were done directly from Chryso South Africa to its customers without being cleared for duty in Kenya.

76. The Respondent stated that the triangular sales ought to have been supported by way of:a.Bill of ladingb.Sample sales invoices to countries outside Kenyac.Sample Pre-export Verification of Conformity(PVoCs)d.Sample Bill of Ladinge.Proof of payments by the clientsf.Entries from the country of destinationg.Confirmation from the customers.

77. The Respondent stated that on imports cleared by Bollore Logistics Kenya and Bollore South Africa using the Appellant's PIN, same required a detailed reconciliations of all imports cleared on behalf by Bollore Logistics Kenya using their PIN and evidence of payment for these goods to show clear demonstration of the amounts claimed for income tax purposes vis a vis those claimed for VAT purposes.

78. The Respondent stated that on the Purchases VAT incurred in one year but claimed in the VAT returns for a different year, the Appellant did not demonstrate how the timing differences affected the variances and the particular invoices that were subject to the variances.

79. On the unsupported expenses, the Respondent averred that the evidence provided was by way of general ledger excerpts and tabulations that were not backed invoices and proof of payment hence the explanations were not satisfactory and the expenses disallowed.

80. The Respondent averred that it issued the assessment as per the provisions of Section 31 of the Tax Procedures Act which allows the Respondent to amend the Appellant's self-assessed returns based on available information and her best judgement.

81. The Respondent stated that it is on the afore-stated reasons that the Appellant thus failed to meet the burden of proof contrary to Section 56(1) of the Tax Procedure Act which provides that in any proceedings, the burden shall be on the taxpayer to prove that a tax decision is incorrect.

Respondent’s Prayers 82. The Respondent prayed that this Honourable Tribunal finds as follows:a.The Respondent's objection decision dated 13th October 2022 be upheld.b.The instant Appeal be dismissed with costs

Issues For Determination 83. The Tribunal upon due consideration of the pleadings of the parties is of the considered view that the issue for determination is:-a.Whether the Objection Decision dated 13th October, 2022 is proper in law

Analysis And Findings 84. The Tribunal having determined the issue for determination as stated above proceeds to deal with the same as hereunder.

85. The Tribunal notes that the Appellant filed its self-assessment VAT and income tax return for the periods 2016,2017,2018,2019 and 2020 in full compliance with the provisions of the VAT Act 2013 and Income Tax Act.

86. The Respondent conducted an assessment on the returns filed by the Appellant for the periods 2015 to 2020 and issued an additional assessment totaling Kshs 97,241,004. 00 citing variance between sales as per the ledgers and sales declared on iT2C, purchases as per VAT 3 against purchases as per iT2C and disallowed expenses amounting to Ksh. 88,488,042. 00 subjected VAT on (expected sales) amounting to Ksh. 6,259,633. 00 and WHT on foreign loans, consultancy and professional fees amounting to Ksh, 2,493, 329. 00

87. The Appellant objected to the assessment on 1st July 2022 and provided all the necessary documents as provided in Section 51(2) and (3) of TPA which states;“(2)A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) as follows-a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc)all the relevant documents relating to the objection have been submitted.”

88. In its Memorandum of Appeal the Appellant stated that the Respondent’s assessment is on the following;i.The variance between sales as per ledgers and sales declared for VAT, purchases as per VAT3 against purchases per IT2C and disallowed expenses amounting to Kshs 88,488,042. 00ii.Subjected VAT on "expected sales" amounting to Kshs 6,259,633. 00iii.Withholding taxes on foreign loans, consultancy and professional fees amounting to Kshs 2,493,329. 00

89. The Appellant conceded to iii) above and proposed to the Respondent to settle the amount in installments. However, the Appellant disputed i) and ii) above.

90. Section 30 of the Tax Appeals Tribunal Act provides as hereunder with regard to burden of proof:-“In proceedings before the Tribunal, the appellant has the burden of proving that ;a)where an appeal relates to an assessment, the assessment is excessive; orb)In any other case, that the tax decision should not have been made or should have been made differently.”

91. To satisfy the above duty, the taxpayer ought to submit all the relevant evidentiary material in its possession. The Tribunal made similar observation in Tax Appeal Number 25 of 2021 Mugo Macharia Kigo v Commissioner of Investigations & Enforcement wherein it stated that:-“a taxpayer is enjoined to provide the necessary documents and information that suggest that such an assessment is erroneous, misplaced and not justified in the circumstances”.

92. The Tribunal has also dealt with a similar matter in Tax Appeal Number 353 of 2018 Rumish Limited vs Commissioner of Domestic Taxes,-23rd July 2021 paragraph 51, when the Tribunal stated as follows: -“Additionally, Section 30 of the Tax Appeals Tribunal Act places the burden of proof on the taxpayer to submit all the necessary documentation to support its case...”

93. In other words, when a taxpayer challenges a tax decision, it is responsible for providing evidence that demonstrates the incorrectness of that decision.

94. The Appellant in its pleadings stated that it provided detailed explanations on the disputed taxes and the same was submitted to the Respondent in its notice of objection and the same was also submitted and explained in detail to the Tribunal in the Memorandum of Appeal, Statement of Facts, submissions and the documents attached to the Appeal

95. In its explanation on i) above- the undeclared income tax sales, the Appellant in its objection notice dated 1st July 2022 stated that the variance were explained by the fact that it charged transportation fees as part of the sales and that while preparing books of account, some of the sales were captured in the export customer’s ledger sales including transportation costs relating to the local sales. Further, the Appellant stated that one of the export customer details was not added.

96. The Appellant also added that part of the variance amounting to Kshs 7,060,271. 00 is explained by application of different rates of translating the sales transactions in the books of account and the rates used in VAT returns submissions. This it stated is because most entries in books of account were in foreign currency.

97. On the variance under purchases income tax and VAT, the Appellant stated that it had purchases that related to sales that were done directly from Chryso South Africa to their customers in other countries without being cleared for duty here in Kenya e.g. direct sales to customers in Uganda, Tanzania etc.

98. The Appellant also stated that for Corporate tax purposes, the sales were declared in the books of Chryso East Africa while the purchases were claimed under cost of sales. However, the purchases did not meet the criteria for being claimed in the VAT returns as import VAT was not paid in Kenya.

99. Also, the Appellant claimed that in 2015 and 2016, most of its client’s imports were being cleared by Bollore Logistics Kenya or Bollore South Africa who would clear the goods in their name and then recover the amount from Chryso South Africa or at times from Chryso East Africa and that for income tax purposes, the sales were declared in the books of Chryso East Africa while the purchases were claimed under cost of sales. It was the Appellant’s explanation that however, the purchases did not meet the criteria for being claimed in the VAT returns since they were cleared in the name of Bollore.

100. Further explanation provided by the Appellant is that purchases VAT incurred in one year but claimed in the VAT returns for a different year; Purchases that did not meet requirements of a valid invoice thus not claimed; Purchases invoices that were more than six months old thus not claimed; and Purchases that were exempt from VAT.

101. On the unsupported expenses, the Appellant asked the Respondent to revise it to zero for the reasons that:- relocation fees relates to staff work permits processing fees plus start up cost in Kenya when the company was being set up all of which are fully supported, CEA salaries and salaries ADM relates to some of the staff cost paid in South Africa but were recharged to Chryso East Africa as per the attached invoices, Increase in leave provision of Kshs 426,538. 00 was added back in the tax computation for the year 2019 which could be confirmed from the tax return filed, bonus provision of Kshs 4,793,752. 00 was treated as a specific provision thus not added back in the tax computation, a portion of the provision was actually paid out in bonuses in the year 2020 and the balance reversed in the same year and that the other expenses are also supported and qualify to be expensed against income as expenses incurred to earn revenue in the respective years.

102. In its objection decision, the Respondent maintained the variances remained unreconciled. Particularly, the Respondent raised the following in response to the Appellant’s objection:i.On the imports cleared by Bollore Logistics Kenya and Bollore South Africa using their PIN, the Respondent stated that it required a detailed reconciliations of all imports cleared on behalf of the Appellant by Bollore Logistics Kenya using its PIN and evidence of payment for these goods. There should be clear demonstration of the amounts claimed for income tax purposes which the Appellant would have claimed VAT should it have been cleared using its PIN.ii.Purchases VAT incurred in one year but claimed in the VAT returns for a different year, the Respondent stated that the Appellant did not demonstrate how the timing differences affected the variances and the particular invoices that were subject to the variances.iii.Purchases that did not meet requirements of a valid invoice thus not claimed, the Respondent stated that a listing of these invoices and the corresponding attachments were not provided.iv.Purchases invoices more than 6 months thus not claimed, the Respondent stated that the Appellant did not provide any support for this assertion.v.Purchases that were exempt from VAT, the Respondent stated that the Appellant did not support this assertion.

103. On unsupported expenses, the Responded found the Appellant to have only provided general ledger extracts and tabulations not backed by any invoices and proof of payment.

104. It is on that basis that the Respondent found the explanations given by the Appellant as unsatisfactory and upheld the assessment of Kshs 97,241,004.

105. The Tribunal notes that vide a letter dated 6th May 2021, the Respondent informed the Appellant of the assessment it had undertaken for the period January 2017 to December, 2019 which revealed variances in the sales as per income tax and VAT, and requested the Appellant to provide a reconciliation with supporting documents, which include audited accounts, trial balances and general ledgers.

106. The Tribunal has analysed the documents provided by the Appellant and it does not agree with the explanation rendered by the Respondent that the Appellant provided general ledger extracts and tabulations with no invoices.

107. Further the Respondent did not satisfactorily respond to the explanations given by the Appellant and did not discount the tabulations provided as explanations for the variances.

108. The Tribunal has perused the bundle of documents attached to the pleadings and has seen invoices, local purchase orders and bills of ladings. The Respondent did not address the weight of the documents given by the Appellant.

109. Further, the Respondent alleged in its Objection decision that the Appellant did not explain how the exchange rates created the variance. On the contrary, the Appellant demonstrated in the tabulations.

110. In the High Court in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR pronounced itself on when can the taxpayer be said to have discharged its burden of proof and the shifted it to the Respondent as follows :-“The Supreme Court of Canada in Johnston v Minister of National Revenue decided that the onus is on the taxpayer to “demolish the basic fact on which the taxation rested.” Also, the Supreme Court of Canada provided guidance on this issue in Hickman Motors Ltd. v Canada that the onus is met when a taxpayer makes out at least a prima facie case. Prima facie is another legal term that literally means “on its face.” To prove a case “on its face” you must provide evidence that, unless rebutted, would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.”

111. The Tribunal is of the considered view that the Appellant made out a prima facie case as it submitted all the necessary documentations and provided explanations in form of tabulations and ledger extracts. Thereafter the burden shifted to the Respondent which did not prove its position in the face of the material information provided by the Appellant, that was not in any manner discredited.

112. The High Court in the afforested case further stated the following on what the Respondent was expected to do upon receipt of documentations from the Appellant:-“But more important, in auditing a taxpayer the Commissioner is required to properly consider the documentation provided and to understand the information. It is not sufficient for the Commissioner to merely request information and then disregard it and to issue an assessment as it sees fit. Where the Commissioner issues an assessment based on the taxpayer's accounts and records but has misconstrued those records then it will be sufficient for the taxpayer to explain the nature of the Commissioner’s misconception, point out the flaws in the analysis and to explain how those records and accounts should be properly understood.”

113. The Tribunal therefore finds that the Respondent failed in that duty and the upshot is that the taxpayer succeeds.

Final Decision 114. In view of the foregoing analysis, the Tribunal finds that the Appeal is merited and the Tribunal accordingly makes the following Orders:a.The Appeal be and is hereby allowed.b.The objection decision dated 13th October, 2022 be and is hereby set aside.c.Each party to bear its own costs.

115. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBEREUNICE NG’ANG’A - MEMBERBERNADETTE GITARI - MEMBER