[2025] KETAT 230 (KLR)

Cipla Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E620 of 2024) [2025] KETAT 230 (KLR) (9 May 2025) (Judgment)

Neutral citation: [2025] KETAT 230 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E620 of 2024

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

May 9, 2025

Between

Cipla Kenya Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company, incorporated in in Kenya and is a subsidiary of CIPLA Medpro South Africa with the ultimate holding company being Cipla Limited (Cipla India). Its principal activity is marketing and distribution of pharmaceutical products purchased from CIPLA India.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On 18th November 2022, the Respondent received the Appellant's application for refund on Corporate Income Tax (CIT) amounting to Kshs. 26,593,801. 00 in respect of its 2022 year of income which ended on 31st March, 2022.

4. On 21st December 2022, the Respondent requested the Appellant for information to enable them conduct an audit on the refund application and some information was shared by the Appellant on 2nd March, 2022 and others on 18th March, 2023.

5. On 7th February, 2024, the Respondent issued its income tax refund audit findings rejecting the Appellant's CIT refund claim amounting to Kshs. 26,593,871. 00 and informed them that in fact a principal tax amounting to Kshs. 223,581,871. 00 had been raised.

6. Consequently, on 13th February, 2024 the Respondent raised additional income tax company assessments which the Appellant objected to on 8th March, 2024.

7. On 6th May, 2024, the Respondent issued its objection decision partially allowing the Appellant’s objection.

8. Aggrieved by the Respondent’s objection decision, the Appellant filed its Notice of Appeal dated and filed on 5th June, 2024.

The Appeal 9. The Appellant’s Memorandum of Appeal dated and filed on 5th June, 2024 was premised on the following grounds:a.That the Respondent erred in law by issuing an additional assessment that is fatally defective as it contravenes Section 31(8) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) thereby making its purported objection decision dated 6th May 2024 erroneous and invalid;b.That the Respondent erred in law and fact in making an objection decision regarding its initial rejection of the Appellant’s refund claim amounting to Kshs. 26,593,801. 00;c.That the Respondent erred in law and in fact in stating that the Appellant underdeclared its revenue by Kshs. 56,219,485. 00;d.That the Respondent erred in law and in fact in stating that the Appellant underdeclared its intercompany cross charge income in the year 2021 by Kshs. 51,753,003. 00;e.That the Appellant erred in law and fact in seeking to charge and collect VAT amounting to Kshs. 8,280,480. 00 on the basis that the Appellant under declared its income.f.That the Respondent erred in fact by erroneously including vacated corporate income tax (hereinafter “CIT”) charged on marketing costs amounting to Kshs. 24,683,209. 00 in its objection decision dated 6th May 2024;g.That the Respondent erred in law and fact by stating that there is a variance between the Appellant’s monthly VAT returns vis-à-vis IT2C returns;h.That the Respondent erred in law and in fact by seeking to disallow alleged overstated costs of sales amounting to Kshs. 122,893,297. 00;i.That the Respondent erred in law and in fact by seeking to disallow cost of sales provisions claimed by the Appellant amounting to Kshs.17,115,829. 00 on the erroneous basis that documentary support was not provided by the Appellant;j.That the Respondent erred in law and in fact by seeking to disallow other operating expenses incurred by the Appellant amounting to Kshs. 32,076,539. 00 on the erroneous basis that documentary support provided by the Appellant was inconsistent;k.That the Respondent erred in law and in fact by seeking to disallow charges relating to employee payroll costs amounting to Kshs. 30,471,679. 00 on the erroneous basis that documentary support was not provided by the Appellant;l.That the Respondent erred in law and in fact in disallowing employment costs amounting to Kshs. 116,047,841. 00 and Kshs. 157,878,471. 00 for the 2021 and 2022 years of income as per Section 16(1) of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”); andm.That the Respondent erred in law and fact in subjecting consultancy costs amounting to Kshs.39,124,068. 00 to PAYE on the mistaken basis that two individuals were contracted by the Appellant as employees and not consultants.

Appellant’s Case 10. The Appellant relied on its Statement of Facts dated 13th June, 2024 and filed on 14th June, 2024.

11. The Appellant reiterated the sequence of events and then outlined in more detail the grounds as set out in its memorandum of appeal. The Appeal was based on the grounds set out in the Memorandum of Appeal and explained below.

I. The Respondent erred in law by issuing an additional assessment that is fatally defective as it contravened Section 31(8) of the TPA. 12. The Respondent issued an additional assessment through its letter dated 7th February 2024 to the Appellant indicating only the principal corporate income tax and VAT that is payable for the tax period 2021 to 2023.

13. In its notice of objection dated 8th March 2024, the Appellant objected to the Respondent’s additional assessment on the basis that it was fatally defective as it did not include the late penalties and interest payable by the Appellant as required by the mandatory provisions of the TPA.

14. The Appellant averred that the architecture of the TPA is one that requires that a taxpayer should be given full opportunity, time and procedures to object or resist an assessment by the Respondent. This is intended to ensure that any obligation to pay additional tax, penalties and interest should only arise where a taxpayer has had the opportunity of understanding the basis of being required to pay such additional tax.

15. Section 31(8) of the TPA provides that the Respondent may make an amended assessment indicating to the taxpayer the tax payable by it for the period in any other case. The law guides on the information that has to be provided to a taxpayer when the Respondent is notifying the taxpayer on the assessed taxes.

16. Section 31(8) of the TPA indicates the form of the amended assessment and what it should entail as follows:“(8)When the Commissioner has made an amended assessment, he or she shall notify the taxpayer in writing of the amended assessment and specify- the amount assessed as tax or the amount of a deficit or excess of input tax carried forward, as the case may be; the amount assessed as late submission penalty and any late payment penalty payable in respect of the tax, deficit or excess input tax assessed; the amount of any late payment interest payable in respect of the tax assessed; the reporting period to which the assessment relates; the due date for payment of the tax, penalty, and interest being a date that is not less than 30 days from the date of service of the notice; and the manner of objecting to the assessment.” [Emphasis added]

17. The use of the word “shall”, in Section 31 (8) of the TPA mandates that a notice of an amended assessment from the Respondent must specify the following:a.The amount of tax assessed;b.The late penalty payable;c.The late interest payable;d.The reporting period;e.The due date for payment of the tax, penalty, and interest; andf.The manner of objection to the assessment.

18. Section 31(8) of the TPA is couched in mandatory terms and cannot be derogated from and since the Respondent allegedly issued the additional assessment under Section 31, the Respondent is required to comply with the express requirements of the said provisions.

19. However, the Respondent’s assessment of 7th February 2024 does not indicate to the Appellant the late penalty and late interest payable and thus is fatally defective on the face of it as it does not comply with the mandatory terms of Section 31(8) of the TPA.

20. The reasons why the law requires that the Respondent must raise an assessment and provide specific details to a taxpayer before demanding payment of tax is:a.to enable the taxpayer to fully understand the basis of the assessment;b.if not satisfied with the basis for assessment, to take the full benefit of Section 51 of the TPA to object to the assessment; andc.provide explanations that would assist the Respondent to reconsider his/her assessment.

21. The Appellant relied on the case of Sukari Investments Limited vs Commissioner of Domestic Taxes TAT Appeal No.81 of 2021, in which the Tribunal stated that the TPA uses the word “SHALL” in mandatory terms and therefore the provisions are binding on the Respondent. The Tribunal stated that where the Respondent’s demand notice does not comply with the provisions of Section 29(2) of the TPA the same does not constitute an assessment and is thus void.

22. Additionally, in Anne Wanjiku Kahwai & another v Kenya Revenue Authority and another [2019] eKLR the High Court quashed a default assessment that did not comply with Section 29 of the TPA as the tax demand did not state the due date for payment and the manner of objecting to the assessment. The Court noted that since the assessment did not comply with Section 29(2) (e) and (f) of the TPA, the Respondent’s demand was unlawful and unprocedural and accordingly set aside.

23. Similarly, in Rooser Roofing East AfricaLimited v Commissioner of Investigations and Enforcement TAT Appeal No. 112 of 2019, the Tribunal stated where an assessment falls short of the requirements of Section 29 of the TPA, the Respondent is in breach of the laid down legislation and thus the assessment is void. The Tribunal in Rooser Roofing East Africa referred to the case of Noor Maalim Hussein and 4 others v Minister for State for Planning, National Development and Vision 2030 and 2 others (2012 eKLR, where the court held as follows:“if statutory power is exercised in a manner contrary to the drafters or against public interest, the power can be said to have been exercised capriciously, irrationally, or unreasonably. Thus, irrationality and unreasonableness would play a major role and we shall as courts continue to assert our traditional duty and intervene in situations where authorities like ministers and persons acting in bad faith, abuse power, fail to take account relevant considerations or act contrary to legitimate expectations”.

24. From the above cited cases, where the Respondent’s assessment fails to comply with Section 29 of the TPA, the notice is deemed to be void. We note that the provisions and requirements of Section 29(2) and Section 31(8) are similar in substance.

25. The Respondent’s additional assessment herein does not comply with Section 31(8)(b) and (c) of the TPA by failing to state the late penalties and late interest payable and is thus arbitrary and oppressive to the Appellant as it does not give full visibility of the total liability (tax, penalties, and interest) that is due and payable and the full extent of the liability to object to.

26. Furthermore, the Respondent does not have the mandate to unilaterally waive any penalties and interests in an assessment. Seeing penalties and interest follow delayed remittance of principal tax liability, it is unclear to the Appellant why these amounts had not been included in the additional assessment of 7th February 2024 despite Respondent averring principal CIT and VAT default.

27. The Appellant averred that an amended assessment ought to contain all the requirements outlined under Section 31 (8) of the TPA and this is stated in mandatory terms as explained in Sukari Investments Limited [supra]. The assessment must legally comply with all the requirements set out in Section 31(8) of the TPA for it to constitute a valid assessment. In the absence of all the requirements under Section 31(8) of the TPA, then the assessment must therefore be deemed to be void and invalid.

28. Based on the above, the Appellant averred that the additional assessment is fatally defective and thus should be set aside in its entirety.

29. The Appellant therefore prayed that the Tribunal would find that the Respondent erred in law by issuing an additional assessment that is fatally defective as it contravenes Section 31(8) of the TPA and thus should be set aside in its entirety.

II. The Respondent’s purported objection decision dated 6th May 2024 is erroneous and invalid 30. On 7th February 2024, the Respondent demanded principal CIT and VAT for the period 2021 to 2023 totalling to Kshs. 223,581,871. 00 exclusive of penalties and interest thereon based on its findings after conducting an audit on the tax affairs of the Appellant.

31. In its notice of objection dated 8th March 2024, the Appellant objected to the Respondent’s assessment on the basis that it was fatally defective on the face of it as it failed to indicate to the Appellant the late penalty and late interest payable as it did not comply with the requirements of the TPA.

32. Without prejudice to its objection to the unprocedural and defective assessment, the Appellant went further and substantively objected to the Appellant’s additional CIT and VAT assessment. The Appellant therefore requested that the additional assessment for the sum of Kshs. 223,581,871. 00 be vacated in its entirety.

33. At paragraph 20 and 21 of its objection decision, the Respondent asserted that it followed due process in issuing its tax decision dated 7th February 2024 and further, that there was no need to compute late penalties and interest since Section 37A of the TPA allows for waiver of interest and penalties.

34. The Appellant found it noteworthy that Section 37A of the TPA quoted and relied on by the Respondent dealt with the rental income amnesty which was in fact repealed by Section 38 of the Finance Act No.8 of 2021.

35. The Appellant stated that it can only be assumed that the Respondent meant to rely on Section 37E of the TPA, which empowers it to waive penalties and interest for tax debts for periods up to 31st December 2022.

36. The above notwithstanding, the Appellant did not dispute that the TPA does allow the Respondent to waive penalties and interest upon fulfilment of the requirements of Section 37E of the TPA. However, this provision does not negate the stipulations of Section 29 and 31 regarding the requirements of a valid notice of assessment which the Appellant has detailed in its ground of appeal above.

37. According to the Respondent, there was no need to compute penalties and interest in its assessment as it has the power to waive penalties and interest and, on this basis, it proceeded to make a decision on the substantive merits of the Appellant’s grounds of objection.

38. The Appellant averred that the Respondent’s position was incorrect and untenable. As explained earlier, the Respondent cannot run away from the mandatory obligations under Section 31(8) of the TPA.

39. Consequently, the Appellant averred that the Respondent relied on a fatally defective assessment to make its objection decision and therefore, it follows that its objection decision dated 6th May 2024 is also defective and invalid.

40. The Appellant found it noteworthy that even in its objection decision, the Respondent still failed to indicate the late penalties and interest payable computing its stated additional taxes due on the Appellant. It was therefore not clear to the Appellant whether the amount averred to be payable by it is inclusive or exclusive of penalties and interest.

41. From the foregoing, the Appellant humbly prayed that the Tribunal would find that the Respondent’s objection decision dated 6th May 2024 was erroneous and invalid as it was based on a defective assessment and vacates the same in its entirety.III. The Respondent erred in law and fact in making an objection decision regarding its initial rejection of the Appellant’s refund claim amounting to Kshs. 26,593,801. 00

42. In its objection decision, the Respondent notes that in its letter dated 7th February 2024, it declined to refund the Appellant an amounting of Kshs. 26,593,801. 00.

43. At paragraph 16 of its objection decision, the Respondent proceeded to state as follows:“However, the credit for the overpaid tax was not given against the additional assessment raised as per the tax decision. Thus, the same will be given in the objection decision if it is established that there is additional tax to pay.”

44. At paragraph 16 of its objection decision, the Respondent continues to state the following:“Without prejudice to the above, a refund decision (rejection of a refund) is an appealable decision and thus you ought to have appealed the same to the Tax Appeals Tribunal and not file an objection regarding the specific issue…”

45. Further, at paragraph 61 of its objection decision, the Respondent after establishing that there were additional taxes Kshs. 26,593,801. 00 against purported due taxes.

46. The Appellant averred that it is not clear why the Respondent decided to offset the said claim of Kshs. 26,593,801. 00 yet it has correctly stated that a refund decision is an appealable decision to the Tribunal. It was the Appellant’s assertion that once the Respondent issued its decision on the Appellant’s refund claim rejecting the same, the only resort the Appellant had was to appeal the Respondent’s rejection at the Tribunal.

47. The Appellant averred that on 8th March 2024, it lodged its notice of appeal at the Tribunal and further filed its substantive appeal papers i.e., memorandum of appeal and statement of facts on 22nd March 2024 being TAT Appeal Number E338 of 2024. Consequently, the matter being before the Tribunal, the Respondent had no powers to offset the said refund claim amounting to Kshs. 26,593,801. 00 while issuing its objection decision.

48. With regard to this issue the Appellant prayed that the Tribunal would find that the Respondent erred in law and fact making a determination on the Appellant’s refund claim yet the same is the subject of an appeal before this Tribunal.

IV. The Respondent erred in law and in fact in stating that the Appellant underdeclared its revenue by Kshs. 56,219,485. 00. 49. The Respondent stated that the Appellant underdeclared its revenue by Kshs. 56,219,485. 00 based on its review of a ledger shared by the Appellant relating to Imperial Health Science (IHS).

50. Through a Memorandum of Agreement dated 1st March 2017 (‘the Agreement’), the Appellant contracted IHS to handle all its importation tasks, warehousing, and order processing. Pursuant to the Agreement, the Appellant remunerates IHS a service fee at the rate of 6. 7% of its gross sales each month.

51. Following its review of the ledger, the Respondent noted that a commission of Kshs. 48,088,812. 00 was paid by the Appellant to IHS in its 2022 year of income. The Respondent then proceeded to work backward using the said commission of Kshs. 48,088,812. 00 to arrive at its averred revenue for the 2022 tax period to be Kshs. 723,894,688. 00 as opposed to the actual Kshs. 667,675,201. 00 which was declared by the Appellant. The Kshs. 667,675,201. 00 could be supported by the monthly invoices issued for that year of income.

52. The Respondent has thus proposed to charge CIT on the variance of Kshs. 56,219,485. 00, being the difference between Kshs. 723,894,688. 00 as recomputed by the Respondent and the actual sales reported by the Appellant of Kshs. 667,675,201. 00.

53. The Appellant asserted that it declared and accounted for all the revenues in the 2022 year of income correctly. During the verification of the refund claim, the Respondent requested for all the sales invoices made by the Appellant in the said year of income to which the Appellant provided for the Respondent’s review.

54. In reaching its conclusion, the Respondent used a single invoice to work backwards. The Appellant asserts that this was an incorrect approach as the Respondent assumed that all sales were evenly distributed throughout the year which was not the case.

55. The Appellant asserted that it attached as its notice of objection, herein reproduced as being the Appellant’s monthly sales invoices for the 2022 year of income for the Respondent’s review. A tally of the invoices shared demonstrated the total sales made by the Appellant in its 2022 year of income amounted to Kshs. 667,675,201. 00

56. The Appellant prayed that the Tribunal would find that the Respondent erred in law and in fact in stating that the Appellant underdeclared its revenue by Kshs. 56,219,485. 00.

V. The Respondent erred in law and in fact in alleging that the Appellant underdeclared its intercompany cross charge income in the year 2021 by Kshs.51,753,003. 00. 57. In its letter dated 7th February 2024, the Respondent averred that the Appellant underdeclared intercompany cross charge income in the 2021 year of income by Kshs. 82,411,218. 00 on the basis that the expected income is less than the costs incurred. The Respondent proceeded to mark up the costs incurred by the Appellant in its 2021 year of income using the 2022 year of income mark-up rate.

58. The Appellant averred that the Respondent erred in law and fact by applying a 2022 mark-up rate to the 2021 Audited Financial Statements. In its objection decision, the Respondent revised its initial assessment in this regard to Kshs. 51,753,003. 00 on the basis that the Appellant seemed to agree with the Respondent’s use of the rate of 48%.

59. The Appellant averred that the Respondent’s position was factually incorrect. The Appellant did not agree with the Respondent’s application of the 2022 year of income mark-up rate to its 2021 year of income costs. The Appellant simply demonstrated to the Respondent on a ‘without prejudice’ basis that the Respondent’s arithmetic computations while using the incorrect mark-up of 48% were incorrect as presented in its letter dated 7th February 2024.

60. The Appellant stated that from a review of the documents provided to the Respondent including the workings and transfer pricing (TP) policy documents, the 2021 rate of five (5) percent was correctly applied.

61. The Appellant averred that the 5% mark-up rate used in the 2021 tax period was based on the benchmarking study in the TP policy. The mark-up of 5% was applied to the cost base of Kshs. 73,526,234. 00 and this resulted in the commission earned of Kshs. 77,202,545. 00.

62. The Appellant averred that the period 2020-2021 was characterized by the Covid 19 pandemic which restricted movement of personnel as well as goods. Ultimately, with reduced movements, the Appellant could not sell to other regions in the sub-Saharan Africa region where they operate which significantly reduced their intercompany cross charge income. On the contrary, staff costs such as salaries remained constant resulting in higher costs than the income for the period.

63. Additionally, the Appellant averred that it has been faced with overlapping audits, assessments and demands, such that the defective assessment dated 7th February 2024 covering the 2021 period in this regard is being issued while there is a separate ongoing audit for the said year of income. The Appellant averred that this overlap was unprocedural and violated the Appellant’s right to fair administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair contrary to Article 47(1) of the Constitution of Kenya, 2010 (hereinafter “the Constitution”).

64. Article 47(1) of the Constitution provides as follows:“Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair” [Emphasis added]

65. The Appellant produced previous communication from the Respondent demonstrating that there was an ongoing audit covering the said period. Based on the foregoing, the Appellant prayed that the Tribunal would find that the Respondent erred in law and in fact by making an averment that the Appellant underdeclared its intercompany cross charge income in the year 2021 by Kshs. 51,753,003. 00.

VI. The Respondent erred in law and fact in seeking to charge and collect VAT amounting to Kshs. 8,280,480. 00 on the basis that the Appellant under declared its income 66. The Appellant averred that VAT is a transactional tax, is due on any taxable supply made by a registered person in Kenya. Further, Section 13(1) of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) provides that the taxable value of a supply shall be the consideration received for the supply.

67. The Appellant averred that the value of the taxable supply it made to Cipla Limited and consequently the revenue earned by it for the supply, is as captured in its invoices to Cipla Limited. This is in accordance with the provisions of Section 42 (1) of the VAT Act which requires a registered person making a taxable supply to issue the purchaser with a tax invoice containing prescribed details for the supply. Such details include the taxable value of the supply and the amount of tax levied on the supply.

68. Seeking to impute revenue to the Appellant based on a mark-up of the costs incurred by the Appellant in its 2021 year of income using the 2022 year of income mark-up rate as opposed to the actual consideration earned by the Appellant as supported by the tax invoices issued by the Appellant to Cipla Limited was in contravention to the provisions of the VAT Act and lacked legal and factual merit.

69. The Appellant stated that it did not under declare its revenue as averred by the Respondent, rather it correctly declared and accounted for VAT on the taxable supplies made by it to Cipla Limited as supported by its invoices. In light of the foregoing, The Appellant prayed for the Tribunal to find that the Respondent erred in law and fact in seeking to charge and collect VAT amounting to Kshs. 8,280,480. 00 on the basis that the Appellant under declared its income

VII. The Respondent erred in fact by erroneously including vacated CIT charged on marketing costs amounting to Kshs. 24,683,209. 00 in its objection decision dated 6th May 2024 70. At paragraph 33 and 34 of its objection decision dated 6th May 2024, the Respondent allowed the Appellant’s ground of objection relating to marketing costs as contained in its notice of objection dated 8th March 2024.

71. The Respondent in its decision agreed with the Appellant that Section 15 of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) allows one to claim expenses in furtherance of business and thus, marketing expenses being allowable deductions, the Respondent proceeded to vacate the erroneous additional CIT amounting to Kshs. 24,683,209. 00 in this regard. However, at paragraph 61 of its decision, the Respondent failed to deduct the additional CIT amounting to Kshs. 24,683,209. 00 for the Appellant’s 2022 year of income despite the amount being described under ‘Amounts dropped at IRO.’

72. Consequently, it was the Appellant’s prayer that the additional taxes amounting to Kshs. 24,683,209. 00 inclusive of penalties and interest be vacated in its entirety.

VIII. The Respondent erred in law and fact by stating that there is a variance between the Appellant’s monthly VAT returns vis-à-vis IT2C returns 73. In its letter dated 7th February 2024, the Respondent averred that it reviewed the Appellant’s monthly VAT returns and its corporate income tax return (“IT2C”) and averred that for the years of income 2022 and 2023, there exists a variance of Kshs. 9,950,777. 00 and Kshs. 18,968,519. 00 respectively. Consequently, the Respondent proceeded to charge CIT to the above noted variances of Kshs. 9,950,777. 00 and Kshs. 18,968,519. 00 for the 2022 and 2023 years of income.

74. According to the Respondent at paragraph 36 in its objection decision, the issue at hand was not really whether there is a variance but rather whether this variance results in a tax liability. The Respondent then went ahead to determine that it cannot determine if the variance has been adequately explained and proceeded to confirm its initial assessment on this basis.

75. The Appellant averred that the Respondent’s position was incorrect. The Respondent cannot claim that it is not material to determine whether a variance exists as initially averred by itself in its letter dated 7th February 2024.

76. The Appellant averred that the additional assessment in this regard is solely because there exists a variance i.e., if there was no variance there would be no resultant CIT demand by the Respondent. Therefore, it was important to establish and explain the cause of the variance and thereafter, determine if there arises any tax liability.

77. Prior to the Respondent issuing its letter dated 7th February 2024, the Appellant prepared and shared with the Respondent a reconciliation of the VAT to IT2C and further explained the variances above via an electronic mail dated 27th November 2023 and reproduced the same while submitting its notice of objection.

78. The Appellant maintained that the variances amounting to Kshs. 9,950,777. 00 and Kshs. 18,968,519. 00 in its VAT to IT2C return mainly related to three items namely:a.Discounts extended to customers;b.Unconverted amounts during filing of the returns; andc.VAT paid on imported services.

79. The Appellant noted that at the audit stage the Appellant provided the reconciliation in which it fully reconciled the variance between the revenues declared for VAT and CIT purposes as averred by the Respondent. The Appellant in its analysis demonstrated how the items in the preceding paragraphs accounted for the Respondent’s stated variance.

80. Consequently, the Respondent’s averments and position that there exists a variance between the Appellant’s monthly VAT returns vis-à-vis IT2C returns resulting into a CIT liability was erroneous.

81. In its letter dated 7th February, 2024, the Respondent extended its audit findings to the 2023 year of income without reviewing any documentation relating to the said year of income and with full knowledge of a separate ongoing audit relating the 2023 year of income as outlined in the documents provided. The Appellant averred that this was an affront to the its right to fair administrative action as the Respondent’s action is unfair and unreasonable contrary to the tenets of Article 47 of the Constitution.

82. The Appellant therefore prayed that the Tribunal would find that the Respondent erred in law and fact by its averment that there is a variance between the Appellant’s monthly VAT returns vis-à-vis IT2C returns and the resultant CIT be set aside.

IX. The Respondent erred in law and in fact by seeking to disallow alleged overstated costs of sales amounting to Kshs. 122,893,297. 00. 83. In its assessment, the Respondent averred that from a review of its customs data records, the Appellant's imports for the 2022 year of income amounted to Kshs. 21,066,276. 00 for which amount is not commensurate to the sales for the period amounting to Kshs. 667,675,201. 00.

84. The Respondent further averred that it requested the Appellant to share import declarations and payments which were not provided by the time of issuing the report. The Respondent proceeded to re-tabulate the Appellant’s cost of sales and disallowed averred overstated costs of sales. In its objection decision, the Respondent confirmed its initial assessment as regards overstated costs of sales on the basis that the Appellant did not satisfy the Respondent that it incurred the costs as claimed.

85. The Appellant averred that through an electronic mail dated 19th January 2024 that it shared all the import declarations and proof of payment as requested by the Respondent for its review. Additionally, the Respondent requested the Appellant to share the detailed breakdown of the inventory movements in the 2022 year of income presented in note 11 of the Audited Financial Statements (AFS). The Appellant averred that these documents and workings were shared with the Respondent via an electronic mail dated 19th January 2024.

86. The Appellant averred that the documents requested by the Respondent were shared with it well ahead of issuance of their report as contained in its letter dated 7th February 2024. It seemed that the Respondent prepared and issued its report without due consideration to the documents provided by the Appellant in this regard.

87. That notwithstanding, the Appellant subsequently reattached to its notice of objection, the customs entry documents and inventory reconciliation as indicated in note 11 of the AFS for the Respondent’s review. From a review of the detailed breakdown and inventory reconciliation, the Appellant averred that the cost of sales as stated by the Appellant were actually incurred and are fully supported.

88. The Appellant prayed for the Tribunal to find that the Respondent erred in law and fact by seeking to disallow the averred overstated costs of sales amounting to Kshs. 122,893,297. 00.

X. The Respondent erred in law and in fact by seeking to disallow cost of sales provisions claimed by the Appellant amounting to Kshs. 17,115,829. 00 on the erroneous basis that documentary support was not provided by the Appellant. 89. In its objection decision, the Respondent stated that the cost of sales provisions claimed by the Appellant amounting to Kshs. 17,115,829. 00 were not deductible for tax purposes and proceeded to disallow them. The Appellant averred that it provided the requested workings and explanations.

90. Upon a review of the workings provided herein the Appellant averred that the disallowed costs by the Respondent amounting to Kshs. 17,115,829. 00 were actual inventory related costs incurred wholly and exclusively for generation of income as per the provisions of Section 15 (1) of the ITA. Section 15(1) of the ITA provides as follows:“15. Deductions allowed.(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.”

91. The Appellant averred that disallowed costs in question incurred by it are in fact an allowable expense pursuant to the provisions of Section 15(1) of the ITA. Consequently, the Appellant prayed for the Tribunal to vacate the Respondent’s erroneous assessment in this regard.

XI. The Respondent erred in law and in fact by seeking to disallow other operating expenses incurred by the Appellant amounting to Kshs. 32,076,539. 00 on the erroneous basis that documentary support provided by the Appellant was inconsistent. 92. In its assessment dated 7th February 2024, the Respondent sought to disallow the Appellant’s operating costs amounting to Kshs. 32,076,539. 00 on the basis that the Appellant provided it with inconsistent documentary support upon request by the Respondent.

93. Subsequently, the Respondent in its objection decision proceeded to confirm its initial assessment. The Appellant maintained that the operating expenses amounting to Kshs.32,076,539. 00 relate to costs resulting from destruction of expired products, rejected stock and quality scrapping which was done by Imperial Managed Solutions E.A. Limited (‘Imperial’).

94. The Appellant asserted that Imperial is its logistics and warehousing partner having been contracted to handle the clearing, warehousing, and dispatch of the Appellant’s products on its behalf.

95. As its logistics partner, Imperial was in charge and oversaw the destruction of the products and stock that had expired or happened to have been rejected due to quality standards. Subsequently, the Ministry of Health issued certificates of disposal to Imperial in its name. The costs relating to the destruction of the unwanted products and stock incurred by Imperial were thereafter reimbursed by the Appellant.

96. The Appellant provided the certificates of disposals from the Ministry of Health together with a listing of the destroyed drugs which were availed to them by Imperial to support its position.

97. The Appellant further provided invoices from Imperial and the proof of payment demonstrating that the cost was indeed incurred by the Appellant. The Appellant prayed that the Tribunal would find that the Respondent erred in law and in fact by seeking to disallow other operating expenses incurred by the Appellant amounting to Kshs. 32,076,539. 00 on the erroneous basis that documentary support provided by the Appellant was inconsistent.

XII. The Respondent erred in law and in fact by seeking to disallow charges relating to employee payroll costs amounting to Kshs. 30,471,679. 00 on the erroneous basis that documentary support was not provided by the Appellant 98. The Respondent, during its audit of the Appellant’s records, noted an amount of Kshs. 30,471,679. 00 which relates to expenses paid to Surgipharm Limited, a company incorporated in Kenya and engaged in the business of importing, marketing, distributing, and selling pharmaceutical products in Kenya.

99. The Appellant averred that it entered into a distribution agreement with Surgipharm Limited (Surgipharm) on 22nd June 2021. Pursuant to the said distribution agreement, Surgipharm is to purchase pharmaceutical products from the Appellant and distribute the same locally.

100. Clause 5. 2. and 5. 3. of the distribution agreement provides as follows:“5. 2.The Distributor(Surgipharm) shall on behalf of Cipla Kenya (the Appellant) incur third party expenses relating to selling, promotion and advertisement while carrying out the distribution of the products and any other activities as required by Cipla Kenya…”“5. 3.The Distributor shall provide Cipla Kenya with the debit notes towards these reimbursable third-party expenses incurred on behalf of Cipla Kenya or for any other activities as required by Cipla Kenya, on a monthly basis along with the invoices for such expenses, which shall constitute prima facie proof of such expenses…”

101. In light of the aforementioned clauses, the Appellant reimbursed Surgipharm for its staff costs incurred in the course of its business amounting to Kshs. 30,471,679. 00 upon receiving invoices and debit notes. The Appellant averred that the reimbursements made by the Appellant amounting to Kshs. 30,471,679. 00 are allowable deductions in light of Section 15(1) of the ITA.

102. The Appellant noted that the Respondent at paragraph 53 of its objection decision stated on a without prejudice basis that some of the invoices shared contained some benefits to employees that should attract PAYE as pursuant to the provisions of the ITA for which the Appellant is yet to demonstrate that PAYE was accounted for.

103. The Appellant averred an objection decision is restricted by law to the assessment raised and the objection tendered. It was not envisaged by law that an objection decision would be extended to cover issues or assessments other than those identified in the assessment objected to. It was not open to the Respondent to abandon its initial claim as canvassed in its initial assessment and seek to rely on an entirely new ground not contained in its assessment.

104. The Appellant prayed that the Tribunal would find that the Respondent erred in law and in fact by seeking to disallow charges relating to employee payroll costs amounting to Kshs. 30,471,679. 00 on the erroneous basis that documentary support was not provided by the Appellant.

XIII. The Respondent erred in law and in fact in disallowing employment costs amounting to Kshs. 116,047,841. 00 and Kshs. 157,878,471. 00 for the 2021 and 2022 years of income as per Section 16(1) of the ITA. 105. In its letter dated 7th February 2024, the Respondent stated that it noted that there was a variance between the Appellant’s employment costs (salaries) as declared in IT2C versus employment costs as per its Pay as You Earn (“PAYE”) returns for the years of income 2021 and 2022 amounting to Kshs. 116,047,841. 00 and Kshs. 157,878,471. 00 respectively.

106. In its assessment, the Respondent also claimed that it requested the Appellant for a list of employees alongside details which included names, personal identification numbers (PIN) and monthly pay to confirm that PAYE was duly deducted and remitted. According to the Respondent, the Appellant failed to provide the said details and thus proceeded to charge CIT on variances.

107. The Appellant averred that through an electronic mail dated 19th January 2024, the Appellant shared the requested information in two excel worksheets, one detailing the employee names, basic pay, bonus received in the year and a second worksheet with details of the Respondent PINs and the month each employee was working. Additionally, the Appellant shared a reconciliation explaining the variances noted by the Respondent above. It seems however the information provided to the Respondent by the Appellant was not considered at the time of preparing the refund audit report.

108. The Appellant averred that the Respondent seems to have not reviewed the supporting documentation provided by the Appellant. The Appellant relied on the case of Nizaba International Trading Company Limited v Kenya Revenue Authority [2000] eKLR, where the High court held that failure to consider material facts presented by a party against whom an assessment had been raised amounts to an abuse of legislative provisions and such an assessment cannot be acted upon.

109. Additionally, the High court in Republic v Kenya Revenue Authority ex-parte Amsco Kenya Limited [2014] eKLR held as follows:“Further an administrative action cannot be said to be procedurally fair where a decision is arrived at based on an opinion formed as a result of the consideration of the version of only one side since by a consideration of one side one cannot be said to have felt certain about the truth of the matter in dispute.”

110. The Appellant further averred that the Respondent acted in a manner that was procedurally unfair by failing to review the records and prayed that this Tribunal finds that the Respondent erred in law and in fact in disallowing employment costs amounting to Kshs. 116,047,841. 00 and Kshs. 157,878,471. 00 for the 2021 and 2022 years of income as per Section 16(1) of the ITA.

XIV. The Respondent erred in law and fact in subjecting consultancy costs amounting to Kshs. 39,124,068. 00 to PAYE on the mistaken basis that two individuals were contracted by the Appellant as employees and not consultants 111. The Respondent averred that the Appellant captured costs amounting to Kshs. 39,124,068. 00 as consultancy costs in its ledger and which were paid to Martin Sweeney and Ben Walker although the two said individuals had employment contracts in place thus could not be paid concurrently as employees and consultants.

112. On this basis, the Respondent proceeded to charge PAYE on costs amounting to Kshs. 30,657,891. 00 and Kshs. 8,466,177. 00 related to Sweeney and Walker respectively. The Appellant averred that whereas the two aforenamed individuals were initially issued with employment contracts, they were at no point double paid as employees and consultants concurrently.

113. Upon issuance of their employment contracts with the Appellant, it was anticipated that they would both get timely clearance to stay and work in Kenya. However, it took time to obtain their work permits and their employment contracts were converted to consultancy contracts to enable them provide services to the Appellant. The Appellant subsequently paid them net of withholding tax (WHT) and this WHT was duly remitted to the Respondent.

114. The Appellant averred that the test on whether one is a consultant or employee was set out in decision of Justice Kimondo in Eldoret Aviation Limited vs Kenya Revenue Authority (through the Commissioner of Domestic Taxes) [2013] eKLR which was echoed and adopted by Lady Justice Onyango in Kollengode Venkatachala Laksminarayan vs Intex Construction Limited [2020] eKLR where Justice Kimondo held as follows:“There are also various tests to be employed when there is doubt whether a person is an employee one of those tests is whether the person’s duties are an integral part of the employer’s business. See Beloff -vs Preddram Ltd (1973) ALL ER 241. The greater the direct control of the employee by the employer, the stronger the ground of holding it to be a contract of service. See Simmons -vs Health Laundry company (19190) I KB 543,0 Kelly -vs- Trust house. Forte (1983) 3 eKLR 456. That test is however not conclusive. The passage cited by the Appellant in Halsbury’s Law of England vol 1,26 4th Edition paragraph 3 is instructive.“There is no single test for determining whether a person is an employee, the test that used to be considered sufficient, that is to say the control test, can no longer be considered sufficient, especially in the case of the employment of highly showed individuals, and is how only one of the particular factors which may assist a court or tribunal in deciding the point. The question whether the person was integrated into the enterprise or remained apart from and independent of it has been suggested as an appropriate test, but it otherwise only one of the relevant factors for the modern approach is to balance all of the factors in deciding on the overall classification of the individual. The factors relevant in a particular case my include, in addition to control and integration, the method of payment, any obligation to work only for the employer, stipulation as to hours, overtime, holidays etc., arrangements for payment of income tax and insurance contribution, how the contract was terminated, whether the individual may delegate work, who provided tools and equipment and who ultimately bears the risk of loss and the chance of profit. In some cases, the nature of the work itself may be important consideration.” [Emphasis added]

115. The Appellant in applying the above to the cited cases to the instant Appeal stated that the consultancy agreements produced make the two individuals; Ben Walker and Martin Sweeney, independent contractors under contracts for services. According to the agreements, the consultants were hired for their professional knowledge and skills and only for a specific and short duration of time being four (4) months. Further, the consultants were not entitled to benefits that normally accrue to employees such as housing, leave days, off days or overtime. The agreements also allowed the consultants to delegate work to third parties however with consent from the Appellant as well as making their own financial decision and bearing their own losses.

116. Moreover, according to the agreements, the Appellant does not dictate the working hours for consultants and neither remitted their statutory deductions. The consultants were only subject to the terms of the agreement. As demonstrated it was clear that the two individuals; Ben Walker and Martin Sweeney were independent contractors and not employees as averred by the Respondent.

117. On this basis, we request this Tribunal to find that the Respondent erred in law and fact in subjecting consultancy costs amounting to Kshs. 39,124,068. 00 to PAYE on the mistaken basis that two individuals were contracted by the Appellant as employees and not consultants.

118. The Appellant sought the following reliefs from the Tribunal:a.That this Appeal be allowed;b.That the Respondent’s objection decision 6th May 2024 be set aside in its entirety;c.That the principal tax of Kshs. 182,885,291. 00 as contained in the Respondent’s objection decision dated 6th May 2024 and attendant penalties and interest demanded by the Respondent be vacated forthwith in their entirety;d.The costs of and incidental to this Appeal be awarded to the Appellant; ande.Any other orders that the Tribunal may deem fit.

Respondent’s Case 119. The Respondent replied to the case by filing its Statement of Facts dated 12th July, 2024 on even date together with the testimony of Mr. Moses Ndirangu whose witness statement was admitted into evidence by the Tribunal on 29th January, 2025. The Respondent stated that in response to the Appellant’s refund claim on 18th November, 2022, it conducted an audit to ascertain the refund application made by the Appellant to amounting to Kshs. 26,593,801. 00 in respect of the year ending 31st March, 2022.

120. That on 21st December, 2022, the Respondent requested the Appellant for the following ledgers to enable it conduct its audit following the refund application: Sales.

Purchases.

Direct Expenses.

Other Income.

Consulting & Professional Services.

Other Operating Expenses.

Trade Receivable.

Other Receivables.

Foreign Loans to Related Parties Listing.

Loans and Advances to Other Listing.

Other Provisions Listing.

Other current liabilities,

Cashbook.

Financial Statement.

Trial balance.

121. The Appellant shared the direct expense ledger on 2nd March, 2023 and then on 18th March, 2023 it shared the cashbook, loans to foreign related parties, trade receivables and other current liabilities and other provisions. Subsequently, the Respondent continued to engage with the Appellant in a bid to elicit the remaining documents before making its audit findings.

122. On 7th February 2024, the Respondent issued its income tax refund audit findings rejecting the Appellant's CIT refund claim amounting to Kshs. 26,593,871. 00 and informed it that the principal tax amounting to Kshs. 223,581,871. 00 had been raised. On 13th February, 2024, the Respondent raised additional income tax company assessments.

123. The Respondent reiterated the grounds raised by the Appellant on the Appeal and responded to each of them as follows:I.The Respondent erred in law by issuing an additional assessment that is fatally defective as it contravenes Section 31(8) of the TPA thereby making its purported objection decision dated 6th May 2024 erroneous and invalid.

124. The Respondent stated that this ground was totally misconceived; the letter dated 7th February, 2024 was not a Notice of Assessment rather, it was a decision with regards to the Appellant's application for refund. As such it cannot be limited to fit the description of an amended assessment under Section 31(8) of the TPA. The Respondent contended that the letter dated 7th February, 2024 is merely a refund decision that informed the Appellant of the outcome of the Audit process; which resulted in new assessments.

125. The Respondent stated that on 13th February 2024, it issued the Appellant with additional income tax assessments that met all the requirements under Section 31 of the TPA. More succinctly, the said assessment included the following:a.The amount taxed;b.The late penalty payable;c.The Interest payable;d.The reporting periods;e.The due date for payment of the tax, penalty and interest; andf.The manner of objection to the assessment.

II. The Respondent erred in law and fact in making an objection decision regarding its initial rejection of the Appellant's refund claim amounting to Kshs. 26,593,801. 00. 126. The Respondent stated that they had already issued the Appellant with a refund decision through the letter dated 7th February, 2024 and as such the Appellant ought not to have objected a refund decision as the Respondent was functus officio.

127. The Respondent notified the Appellant through paragraph 18 of its objection decision that it ought to have filed an Appeal at the Tribunal instead of filing an objection to dispute to the refund decision. The Respondent contended that the Appellant was acting in bad faith as it has failed to appeal to the specific refund decision and wishes to sneak in the same in current appeal which is an appeal to the objection decision dated 6th May 2024.

128. Further, the Respondent contended that even if the Tribunal were to include the Appellant's appeal on the refund under this current appeal, the same would be deemed out of time as the Respondent issued the Refund Decision on 2nd February 2024 and the Appellant filed this current appeal on 5th June 2024 contrary to Section 13 of the TPA with provides as follows:“Procedure for appealI.A notice of appeal to the Tribunal shall-a.be in writing or through electronic means;b.be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.”

III. The Respondent erred in law and fact in stating that the Appellant under declared its intercompany cross charge income in the year 2021 by Kshs 56, 219, 485. 00. 129. The Respondent humbly averred that it reviewed the Appellant's sales ledgers, invoices and the contracts. Specifically, the contract stated a particular percentage (6. 7%) as compensation (Service fee) to the related entity. This compensation was traced in the book of account (service fee ledger), and the net amount was found to be KShs 48,088,812. 00 for year 2022. After working backwards, the expected sales was found to be Kshs 723,894,688. 00 thus showing under declared income of Kshs 56,219,485. 00.

130. The Appellant averred that all the Income was declared as per the invoices (Kshs 667,675,201. 00) without demonstrating why there was a variance based on the Memorandum of Agreement with Imperial Health Science Limited which provided a compensation of 6. 7%.

131. The Appellant at objection stage was requested to provide documentary evidence other than the invoices to demonstrate that there wasn't an under declaration; however, the Appellant at objection and at appeal has failed to produce the same.

132. Section 56 of the TPA provides as follows:“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”(2)An appeal to the High Court or to the Court of Appeal shall be on a question of law only.(3)In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.”

IV. The Respondent erred in law and in fact in stating that the Appellant underdeclared its intercompany cross charge income in the year 2021 by Kshs. 51,753,003. 00. 133. At the assessment stage the Respondent realized that there was under declaration in the year 2021 since the expected income was less than the costs incurred. Therefore, the 2021 costs were marked up using the 2022 markup rate and under declared income of Kshs 82,411,218. 00 was brought to charge.

134. Upon review of paragraph 41 of Appellant's grounds of objection, the Respondent noted that the Appellant only stated that the applicable rate should not have been that of year 2022, but failed to provide the correct rate with verifiable proof for the same.

135. lt was imperial to note that the Appellant seemed to agree with the Respondent's use of the rate of 48% and indicated there was an arithmetical error in the computation. That the amount should have been Kshs 51,753,003. 00 and not Kshs. 82,411,218. 00.

136. Without prejudice, at objection stage (objection decision) the under declared income was revised to Kshs 51,753,003. 00 on account of the arithmetical error. Appellant did not provide any documents to proof the alleged increase in costs as stated at paragraph 43 of their notice of objection and thus this fact cannot be substantiated.

137. The Respondent stated that the Appellant was required to maintain all records under Section 23 of the TPA which provides as follows:“Record-keeping1. 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 '.f tax liability to be readily ascertained; andc.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.”

138. The onus of proof was placed on the Appellant, and rightful so for him to prove that the there was no under declaration but failed to do the same.

V. The Respondent erred in law and fact in seeking to charge and collect VAT amounting to Kshs. 8,280. 480. 00 on the basis that the Appellant declared its income and the Respondent erred in law and in fact by alleging that there is a variance between the Appellant's monthly VAT returns vis-a-vis IT2C returns. 139. The Respondent stated that in determining whether a variance should attract tax or not the Appellant should provide the following information and documents are necessary:i.A schedule of invoices as per VAT returns for the 12 months for each year showing the invoice date, invoice amount, name of buyer (where applicable), and invoice number.ii.A schedule of invoices as per Income Tax for each year showing the invoice date, invoice amount, name of buyer (where applicable) and invoice number.iii.A comparison of (i) and (ii) above to identify the particular invoices causing the variance.iv.A review of (iii) above to determine why the same are not subjected to income tax.v.The specific invoice (physical) to support (iv) above.

140. The Respondent further stated that at objection they reviewed the Appellant's reconciliations and noted that the Appellant was fully aware of the variance however, the Appellant could not explain the variance. The Respondent also stated that the reconciliations provided by the Appellant did not provide a breakdown of the invoices with regards to the specific values thus the whole amount was brought to charge.

VI. The Respondent has erred in fact by erroneously including vacated CIT charged on marketing costs amounting to Kshs. 24,683,209. 00 in its objection decision dated 6th May 2024. 141. The Respondent averred that marketing costs were allowed and the tax of Kshs 7,404,962. 00 vacated. The same was dropped as communicated in paragraph 33 and 34 of the objection decision. The revised tax payable for year 2022 should be Kshs. 80,618,282. 00 However, as the table for taxes was transferred in paragraph 61 (summary of taxes) the Kshs 7, 404,962. 00 was added instead of being deducted.

142. Therefore, the substantive matter was the cost of marketing was allowed.

VI. The Respondent erred in law and fact by seeking to disallow overstated cost of sales amounting to Kshs. 122,893,297. 00. 143. The additional assessment was raised on the basis that the Respondent was not able to verify the importation of goods to the magnitude stated in Appellant's books of accounts. The Appellant did not provide verifiable Customs entries and costs of purchases that was reflective of the cost of sales claimed. At appendix 12, 13 of the Appellant’s notice of objection it averred that the documents were availed. However, Respondent established the following upon review of the same appendices.

144. Appendix 12 is an electronic mail attachment of communication between Appellant and Respondent's assessing team. It did not contain any documents that could be review independently at objection stage to establish that the costs of sales as claimed in the audited financial statements was incurred. Appendices 13(a) and 13(b) were excel workings and without the primary documents (import documents, purchase invoices and evidence of payment) respondent was limited in scope to agree with your grounds of objection.

145. Thus, the only way the Appellant would have discharged its burden of proof is by providing primary documentation.

VI. The Respondent erred in law and in fact by seeking to disallow cost of sales provisions claimed by the Appellant amounting to Kshs. 17,115,829. 00 on the erroneous basis that documentary support was not provided by the Appellant. 146. The Respondent contended that Section 15 of ITA requires that an expense must be incurred. Thus, the Appellant could not claim a provision as a cost as the same is yet to be incurred. Appendix 14 of the Appellant's notice of objection was an excel working and without the primary documents (invoices and proof of payment) the Respondent could not agree with the Appellant's unsupported grounds.

VI. The Respondent erred in law and in fact by seeking to disallow other operating expenses incurred by the Appellant amounting to KShs.32,076,539. 00 on the erroneous basis that the documentary support provided by the Appellant was inconsistent. 147. The Respondent averred that it evaluated the certificate as per Appendix 15 of notice of objection and noted that it was not accompanied with the schedule of invoice(s), the physical copies of the invoices and proof of payment for the goods that would have enabled it to determine the following:a.The listed items as per the appendix 15 are the same as shown in the invoices.b.From the invoice(s) the cost value of the goods and thus the extent of the cost to be allowed.c.That the items had actually been procured by proof of payment.

148. Due to lack of documentation stated above the Respondent confirmed the assessments.

VI. The Respondent erred in law and fact in fact by seeking to disallow charges relating to employee’s payroll costs amounting to Kshs. 30,471,679. 00 on the erroneous basis that documentary support was not provided by the Appellant. 149. The Respondent stated that the Appellant provided Appendix 16 of the notice of objection to support the payroll costs. Upon review of the Appellant's invoices the Respondent noted that the costs have been classified as reimbursement costs to Appellant. The schedule attached to the invoice's details employees' names and the benefits they were being paid.

150. However. Appellant did not provide proof of payment showing that the same had actually been paid. Such evidence was needed to map each invoice to bank statements to show the same was paid. On a without prejudice basis and having presented the documents at only objection stage. a look at the same showed items such as lunch, fuel expenses for staff, airtime expenses, parking expenses, relocation expenses etc. being paid to the employees. Such benefits to employees should attract PAYE in line with Section 37 of ITA if the same are beyond the prescribed limits.

VI. The Respondent erred in law and fact by seeking to disallow employment costs amounting to Kshs 116,047,841. 00 and Kshs. 157,878,471. 00 for the 2021 and 2022 years of income as per Section 16(1) of the ITA. 151. Respondent averred that appendix 12 of the Appellant's notice of objection was an electronic mail communication and it's not documents to support the employment costs.

152. In that regard, the Respondent was not in a position to independently verify that these costs were actually incurred. The documents needed would have been the invoices and proof of payment of the employment costs. Thus, due to limitation of scope the assessments were confirmed.

VI. The Respondent erred in law and fact by in subjecting consultancy fees amounting to Kshs 39,124,068. 00 to PAYE on the mistaken basis that two individuals were contracted by the Appellant. 153. The Respondent stated that upon review of appendix 17 (d) of notice of objection they noted that the contract is between Appellant and A Walker Consultancy (PTY) Limited with a registered office in South Africa. From this name the Respondent averred that it was a limited company and not an individual and thus Appellant's assertions that there were delays to get work permits is contradicting as one cannot get a work permit for a company. Without prejudice this being a South African Company, were the Respondent to agree with the Appellant then the Withholding tax should have been withheld at 15% as per the DTA and not 5%.

154. Further, had the consultancy services been provided by Benjamin in his own capacity, the Respondent would have expected the Appellant to provide his passport copies for us to determine his residency status so as to charge withholding tax at 5 %.

155. The Respondent averred that the agreement availed by the Appellant provides for the other employee such as Martin Sweeney; yet Martin Sweeney is listed as a director. With that regard the assessments were fully confirmed.

156. The Respondent sought the following reliefs:a.That the Appeal herein be dismissed with cost to the Respondent.b.The Respondents objection decision dated 6th May 2024 be allowed.

Parties’ Submissions 157. Parties were to file their respective written submission on or before 19th February, 2025. The Appellant complied whilst the Respondent did not and therefore the Respondent’s written submission dated 4th March, 2025 and filed on 5th March, 2025 have been expunged from the record.

158. In its submissions, the Appellant outlined its grounds of Appeal as its issues for determination thereby reiterating its memorandum of appeal and statement of facts and the Tribunal will therefore not rehash the same.

Issues for Determination 159. The Tribunal having carefully considered parties’ pleadings, documentation and Appellant’s submissions where applicable is of the view that the following two issues call for its determination.a.Whether the Respondent contravened Section 31 (8) of the TPA.b.Whether the Appellant discharged its burden of proving that the Respondent’s objection decision dated 6th May, 2024 was incorrect or ought to have been made differently.

Analysis and Findings 160. The Tribunal will proceed to analyse the issue as hereinunder:a.Whether the Respondent contravened Section 31 (8) of the TPA.

161. The genesis of this dispute is a letter to the Appellant dated 7th February, 2024 with the heading “income tax refund audit findings.” This refund decision was the subject matter of TAT Appeal 338 of 2024 wherein the Tribunal found in favour of the Appellant, set aside the Refund decision and ordered the Respondent to refund the Appellant. The Tribunal will not delve into the merits or demerits of this case in compliance with the principle of “ res judicata”.

162. The Tribunal notes that as the Respondent issued its refund decision, it also issued assessments on 13th February, 2024, and the Appellant objected to the same on 8th March, 2024. The Respondent upon auditing the Appellant averred that it found that there were additional taxes to be paid. The Tribunal will limit itself to the objection to the assessments dated 13th February, 2024 and the ensuing appeal against the impugned decision on 6th May, 2024.

163. The Tribunal notes the Appellant’s averment that the assessments issued through the refund decision dated 7th February, 2024 were contrary to the following provisions of 31 (8) of the TPA:“(8)When the Commissioner has made an amended assessment, he or she shall notify the taxpayer in writing of the amended assessment and specify—(a)the amount assessed as tax or the deficit or excess input tax carried forward, as the case may be;(b)any amount assessed as late payment penalty payable in respect of the tax assessed;(c)any amount of late payment interest payable in respect of the tax assessed;(d)the reporting period to which the assessment relates;(e)the due date for payment of any tax, penalty or interest being a date that is not less than thirty days from the date of the taxpayer received the notice; and(f)the manner of objecting to the assessment.”

164. The Tribunal by its Judgement in TAT Appeal No. 338 of 2024 having determined the letter dated 7th February, 2024 was a refund decision, finds the Appellant’s reference to the letter dated 7th February, 2024 as an assessment to be incorrect. The Respondent, issued two assessment orders numbers KRA20XXXXX887 in respect of the period 1st April, 2020 to 31st March, 2021 and KRA20XXXXXX860 in respect of the period 1st April, 2021 to 31st March, 2022. These are the two assessments against which the Appellant objected on 8th March, 2024.

165. The Tribunal notes the averment by the Appellant that the additional assessment as embodied in the letter dated 7th February, 2024 did not comply with the provisions of Section 31 (8) (b) and (c) of the TPA in that the Respondent failed to indicate the penalties and interest due and payable. However, the Letter dated 7th February, 2024 was not an assessment but a refund decision.

166. Accordingly, the Tribunal finds that the assessments that it ought to examine to determine whether or not the Respondent contravened the provisions of Section 31 (8) of the TPA are those dated 13th February, 2024 which have been outlined in paragraph 164 above. The view of the Tribunal is that it is not mandatory for the Respondent to assess penalties and interest and therefore the Appellant has failed to explain how the Assessments contravened the provisions of Section 31 (8) of the TPA. More particularly a closer examination of the provisions of Section 31 (8)b) and (c) of the TPA makes it discretionary for the Respondent to include “any” penalties and interest and therefore it is not mandatory for the Respondent to assess for penalties and interest. The assessments contained all the elements envisioned by Section 31 (8) of the TPA and were properly issued by the Respondent.

167. The finding of the Tribunal in this regard is that the Respondent did not contravene the provisions of Section 31 (8) of the TPA.b.Whether the Appellant discharged its burden of proving that the Respondent’s objection decision dated 6th May, 2024 was incorrect or ought to have been made differently.

168. The Tribunal notes the averment by the Appellant that the Respondent erroneously made its decision on the basis that the Appellant under declared its revenue by Kshs. 56,219,485. 00. The Tribunal has reviewed an Agreement for sale between it and Imperial Health Sciences Kenya Limited and notes that indeed the fee was agreed at 6. 7% of the revenue.

169. The Respondent in this regard indicated that though the Appellant provided invoices, it did not explain the variances. However, the Tribunal sighted detailed invoices in the Appellant’s bundle of documents clearly indicating various recoveries and costs that would have led to the variances and that the income that the Appellant earned for the year amounted to Kshs. 667,675,201. 00. The Respondent ought to have reviewed the documents provided upon receiving the explanation on the reasons for the variances.

170. The Tribunal further notes the Respondent’s averment that the Appellant underdeclared its intercompany cross charge income in the year 2021 by Kshs. 51,753,003. 00 upon its discovery that in 2021 the income was less than the costs incurred. The Respondent applied its own rate of 48% to markup the costs, which it claimed the Appellant agreed to. However, the Appellant adduced in evidence its Transfer pricing policy and the Respondent did not controvert the same.

171. The Tribunal notes the averment by the Appellant that the Respondent having calculated the Appellant’s undeclared income of Kshs. 51,753,003. 00 arising from undeclared intercompany cross charge income, applied the rate of 16% on the same and this resulted in a VAT charge of Kshs. 8,280,480. 00 assessed on the Appellant. Having found that the Appellant did not under- declare the intercompany cross charge income, the Tribunal finds that this assessment for VAT by the Respondent was erroneous.

172. The Tribunal notes that the Respondent admitted in its pleadings at paragraph 36-38 of its statement of facts that it erroneously included vacated corporate income tax charged on marketing costs amounting to Kshs. 24,683,209. 00 in its objection decision dated 6th May 2024.

173. The Tribunal notes the averment by the Respondent that the Appellant overstated costs of sales amounting to Kshs. 122,893,297. 00, which it sought to disallow. The Tribunal has sighted an electronic mail of 19th January, 2024 through which the Appellant attached the documents requested. The Respondent ought to have reviewed the documents including, import declarations and proof of payment and this would have enabled it make its decision. The appellant shared the analysis of the inventory movements in respect of the 2022 year of income through its audited Financial Statements on 19th January, 2024. accordingly, the Appellant’s costs of sales were incurred and were supported.

174. The Tribunal notes that the Respondent disallowed costs of sales provisions claimed by the Appellant amounting to Kshs. 17,115,829. 00 on the basis that the Appellant did not provide documentary support. The Tribunal notes that the Appellant provided the general ledger workings in support of the workings for cost of sales provision which the Respondent never controverted. Accordingly, the Respondent’s decision to disallow these provisions was incorrect.

175. With regard to the operating expenses of Kshs. 32,076,539. 00, the Respondent disallowed the costs on the basis that documentary support provided by the Appellant was inconsistent. The Tribunal has sighted the IHS licence permitting it to destroy expired drugs and the Appellant provided invoices indicating that it reimburses IHS for the costs. The Respondent’s averment that the Appellant did not produce documentary evidence to support these expenses was incorrect.

176. The Tribunal notes that the Respondent disallowed charges relating to employee payroll costs amounting to Kshs. 30,471,679. 00 on the basis that documentary support was not provided by the Appellant. However, the Tribunal has sighted the Agreement that the Appellant has with Surgipham as well as the invoices through which it reimbursed Surgipharm for its staff costs. The reimbursements by the Appellant were allowable costs pursuant to Section 15 (1) of the ITA.

177. The Tribunal notes the averment by the Appellant that the Respondent disallowed employment costs amounting to Kshs. 116,047,841. 00 and Kshs. 157,878,471. 00 for the 2021 and 2022 years of income pursuant to the provisions of Section 16(1) of the ITA. However, the Tribunal has sighted the documents provided by the Appellant such as the list of employees, their corresponding PINs and details of the months in which the employees were working. Accordingly, the Respondent, ought to have reviewed the said records as provided vide an electronic mail dated 19th January, 2024. It is notable that the documents the Respondent requested such invoices of proof of payment may have been impertinent, the excel worksheets were sufficient and acted as a payroll. In any case, if the Respondent found the information doubtful, it ought to have compared the provided documents with its data.

178. The Tribunal notes that the Respondent subjected consultancy costs amounting to Kshs.39,124,068. 00 to PAYE on the basis that two individuals were contracted by the Appellant as employees and not consultants. The Appellant attached a Consultancy Agreement which was between it and an entity which has a corporate personality. The Tribunal further notes that the Appellant indicated that it had signed employment contracts with Mr. Sweeney and Mr. Ben Walker but that it had to convert the employment contracts to consultancy contracts to enable them provide services to it. The Appellant stated that it adduced in evidence of consultancy agreement for both individuals. However, the Tribunal only sighted a consultancy Agreement between an entity called A Walker Consultancy PTY limited and therefore to that extent the Appellant did not discharge its burden of proving that Mr. Sweeny and Mr. Ben Walker, incomes were not subject to PAYE.

179. The Tribunal cites the cases of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR; William 0'Dwyer and Sloan O'Dwyer v Commissioner of Internal Revenue 266 F.2d 575; and Mulherin v Commissioner of Taxation [2013] FCAFC 115 where courts held that the Appellant has a duty to prove that an assessment was incorrect.

180. Pursuant to the provisions of Section 56 (1) of the TPA, a taxpayer has the burden of proving that the Commissioner’s decision is incorrect or ought to have been made differently. The Tribunal finds that the Appellant in the instant Appeal partially discharged its burden of proving that the Respondent’s objection decision dated 6th May, 2024 was incorrect or ought to have been made differently.

Final Decision 181. The upshot of the foregoing is that the Appeal herein partially succeeds and accordingly the Tribunal proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 6th May, 2024 be and is hereby varied in the following terms:i.The assessments in relation to intercompany cross charge income, revenue, marketing costs, cost of sales, operating expenses and VAT be and are hereby set aside; andii.The PAYE assessment of Ksh 39,124,068. 00 in relation to consultancy costs be and is hereby upheld.c.Each party to bear its own cost.

182. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 9TH DAY OF MAY 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER