[2023] KETAT 163 (KLR)

Cyka Manpower Services Limited v Commissioner of Domestic Taxes (Appeal 21 of 2022) [2023] KETAT 163 (KLR) (Civ) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 163 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 21 of 2022

E.N Wafula, Chair, RO Oluoch, RM Mutuma & EK Cheluget, Members

February 10, 2023

Between

Cyka Manpower Services Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the Laws of Kenya and its principle activity is in the business of manpower services to various customers across the country.

2. The Respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent carried out a desktop review of the Appellant’s affairs and it established that sales worth Kshs 558,863,189. 00 were misclassified as exempt from VAT for the period of January 2016 to December 2020. Arising from this review the Commissioner issued additional assessments of Kshs 87,148,002. 00 vide a letter dated the 14th of June, 2021.

4. The Appellant object to this assessment vide a letter dated the 6th July 2021 and was advised by the Independent Review Objection Division vide a letter dated the 11th July 2021 that its objection was invalid.

5. Several meetings were held between the parties in the intervening period culminating in the issuance of an Objection Decision on the 22nd November 2021 wherein the objection lodged was rejected and the assessment of Kshs 87,148,002. 00 was affirmed.

The Appeal 6. The Appellant filed its Memorandum of Appeal dated and filed on 10th January,2022 in which it has set out the following grounds of appeal;a.Section 2 of the Value Added Tax Act, 2013, states that the supply of services means “anything that is not a supply of goods or money, including the performance of services for another person.”b.Section 5(1)(a) of the Value Added tax Act, 2013, states that “A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on a taxable supply made by a registered person in Kenya.”c.The Appellant is in the business of supplying manpower management services that are subject to value added tax.d.The Respondent erred in both fact and law in arriving at the conclusion that the salaries paid by the Appellant to the employees on behalf of the Appellant’s clients should be categorized as a taxable service.e.The Respondent erred in both fact and law in arriving at the conclusion that the salaries paid by the Appellant to the employees on behalf of the Appellant’s clients should be subject to value added tax.f.The Respondent failed to take into consideration that the Appellant has been trading and providing manpower services for over ten years, and was subject to audits by the Respondent in 2012 and 2015. The audits did not raise any additional assessment on the Appellant. The Respondent’s decision thus infringes and violates the Appellant’s legitimate expectation of certainty in taxation.

Preliminary Objection 7. The Appellant in addition to filing an Appeal lodged a Notice of Objection dated and filed on the 10th January 2022 urging the Tribunal to annul the Respondent’s objection decision dated the 22nd November 2022 for the following reasons:a.Section 51(1) of the Tax Procedures Act, 2015, sets out that a taxpayer who wishes to dispute a tax decision shall first lodge an objection against the tax decision under this Section before proceeding under any other written law. Section 51(2) of the Act then provides that a taxpayer who disputes a tax assessment may lodge a notice of objection to the assessment, in writing, with the Commissioner within thirty days of being notified of the assessment.b.The Respondent herein issued the Appellant with Assessments Orders Numbers KRA202XXX1188673, KRA202XXX210822, KRA202XXX213699, KRA202110216025 and KRA202110218011, all dated 9th June 2021. The Appellant disputed and objected to these assessment orders vide its objection all dated 24th June 2021. c.The Respondent then issued the Appellant with its Objection Decision for Additional Assessments for VAT, dated 22nd November 2021. This Objection Decision was issued to the Appellant by the Respondent more than sixty days from the date of the Appellant’s objections.d.Section 51(11) of the Tax Procedures Act, 2015, provides that where the Commissioner has not made an objection decision within sixty days from the date the taxpayer lodged a notice of the objection, the objection shall be allowed.

The Appelant’s Case 8. The Appellant’s case is premised on its Statement of Facts dated and filed on 10th January, 2022 and the Appellant’s written submissions dated 22nd April, 2022 and filed on 25th April, 2022

9. The Appellant states that it:a.Requested the Respondent for documents on the 8th of December 2020 to support its reconciliation and explanation on the sales classified as exempt from VAT.b.Was engaged in numerous correspondences with the Respondent between the 8th December 2020 to 14th June 2021, and that during this audit assessment period it provided the Respondent with all the documents that it had requested.c.Received communication from the Respondent on 14th June 2021, in relation to VAT for the period January 2016- March 2021, and PAYE for the period January 2016 to March 2021, whereof it was directed to pay a principal additional tax of Kshs. 87,148,002. 00d.Objected to this assessment on the 24th June 2021. e.Held various meetings with the Respondent between the 24th June 2021 and end of August 2021. The said discussions informed the Respondent that the Appellant had been subjected to compliance audits for the period, inter alia, January 2009 to 2015, wherein the Commissioner was satisfied by the Appellant’s explanations and no additional assessments on the Appellant were raised.f.Communicated to the Respondent on numerous occasions requesting for an objection Decision.

10. The Appellant posits that the Commissioner finally issued its objection decision on the 22nd November 2021 for VAT amounting to Kshs. 87,148,002. 00 for the period January 2016 to December 2020.

11. It was its view that this objection decision had been rendered outside the time stipulated by Section 51(11) of the Tax Procedure Act, 2015.

12. The Appellant stated that the superior court has asserted that an objection decision filed out of time is a nullity in the following cases:a.Vivo Energy Kenya Limited v Commissioner of Customs and Border Control, Kenya Revenue Authority(2020)eKLR.b.Republic v Commissioner of Domestic Taxes exparte Fleur Investments Limited (2020) eKLR, where Justice Mativo stated that:“A stated above, the Respondent never filed a Replying Affidavit to rebut the averments that it never rendered a decision following the applicant’s objection. There is nothing before me to show that the Respondent made an objection decision as the law requires. By virtue of the clear provisions of section 51(8) and (11) of the TPA, the Respondent is deemed to have allowed the applicant’s objection. I find backing in Republic v Commissioner of Customs Services Ex-Parte Unilever Kenya Limited [14] in which the court stated that if the Commissioner does not render a decision within the stipulated period, the objection is deemed as allowed by operation of the law. The act requires that where the Commissioner has not made an objection decision within 60 days from the date the tax payer lodged the notice of objection, the objection shall be allowed. This means that the issues that the tax payer had raised in the notice of objection will be accepted. In case of a tax assessment, it will be vacated. On this ground alone, the applicant’s application succeeds.”

13. That flowing from the above case laws, the Appellant prayed that its Appeal be allowed and Preliminary Objection be upheld in terms of section 51(8) and (11) of the TPA.

14. The Appellant argued that in view of the foregoing there is no tax to be demanded and even if it were payable the assessment issued by the Respondent is incorrect.

15. Its further argument is that the total figure in the five assessments that were issued to it do not correspond to the total figures that have been subjected to tax.

Appellant’s Prayer 16. For the above reasons, the Appellant prays that this Honourable Tribunal annuls the Respondent’s Objection decision dated 22nd November 2021 with costs to the Appellant.

Respondent’s Case 17. The Respondent has set out its response to the Appellant’s Appeal in the Statement of Facts dated 9th February, 2022 and filed on 10th February 2022 and the written submissions dated and filed on 19th April 2022.

18. The Respondent proposed the following as the issues that present themselves for determination in this Appeal:

i. Validity of the objection decision 19. The Respondent relied on Section 51(11) of the TPA which provides that: “The Commissioner shall make the objection decision within sixty days from the date of receipt of –a.a valid notice of objection; orb.any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

20. It argued that time started running after it had received the additional documents it had requested from the Appellant as exhibited in the following documents:a.Tax demand by the Respondent’s on 14th June 2021 at page 780 of the Appellant’s record of appeal.b.Objection letter by the Appellant dated 24th June 2021 at page 799 of the Appellant’s record of appeal.c.A letter dated 5th November, 2021 by the Appellant submitting more documents and requesting for the withdrawal of the assessments at page 813 of the Appellant’s record of appeal.d.A letter dated the 2nd of November 2021 where issues under consideration were being referred to at page 824 of the record of appeal.

21. In the Respondent’s view, the foregoing communication fell within section 51(11) (b) of the TPA and this brought the Objection Decision within the 60 days limit that is allowed by law. It supported its position with the following decisions of the Tribunal:a.Nrb TAT 304 of 2020 Desert Star Transporters Ltd v Comm I & Eb.Nrb Tat 109 of 2016 Subaru Motors v Comm. I & E

22. It affirmed that time to render the objection decision started running on the 18th of November 2021 which was the last day when the parties held a meeting.

ii. Was there a Valid Appeal 23. The Respondent cited section 13(2) of the TAT Act which states that:“The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—a.a memorandum of appeal;b.statements of facts; andc.the tax decision.”

24. The Respondent submitted that the Appellant’s Notice of Appeal was lodged on the 20th of December 2021 and its Memorandum of Appeal was lodged at the Tribunal on the 10th of January 2022, which was about 20 days later. The Tribunal was not moved to grant the Appellant leave to file the documents out of time.

25. It posited that this lapse breached the express provisions of the law and made the instant Appeal ripe for striking out.

iii. Whether salaries paid by the Appellant to the employees on behalf of the Appellants’ clients are categorized as ‘exempt supplies’. 26. The Respondent cited Section 2 of the VAT Actwhich states that:“exempt supplies” means supplies specified in the First Schedule which are not subject to tax.'

27. It was its position that the goods and services supplied by the Appellant were not listed in the First Schedule to the VAT Act and they were thus subject to VAT. The plain reading of the law therefore requires that these transactions be taxed as was stressed in:a.Republic v Commissioner of Domestic Taxes Large Taxpayers Office Ex-Parte Barclays Bank of Kenya Ltd [2012]eKLRb.Mount Kenya Bottlers Limited and 3 Others v Attorney General & 3 Others[2019]eKLRc.Republic v Kenya Revenue Authority Ex-parte Cosmos Ltd [2016]eKLR

iv. What is the Value of taxable supplies made by the Appellant? 28. The Respondent argued that the Appellant had declared the payments made to its employees in two proportions in different Sections of the VAT return. It was its view that services offered by the Appellant were vatable and there was no need to separate the declarations in two portions.

29. It is on this premise that it argued that the sale for Kshs 558,863,189. 00 for periods 2016-2020 were misclassified as exempt supplies. These sales were thus subject to VAT of 14% and 16% depending on the applicable VAT for the respective years, resulting in a tax assessment of Kshs 87,148,003. 00

Respondent’s Prayer 30. The Respondent’s prayer to the Tribunal to find that the Appellant’s Appeal lacks merit and should thus be dismissed with costs to the Respondent.

Issues For Determination 31. The Tribunal having considered the pleadings filed, evidence adduced and submissions made by the parties is of the considered view that the Appeal distils into the following issues for determination:a.Whether the Respondent’s objection decision was valid;b.Whether the Appellant’s Appeal was valid; andc.Whether the Respondent’s tax assessment of Kshs 87,148,003. 00 was justified.

Analysis And Determination a) Whether the Respondent’s objection decision was valid. 32. Section 51(11) of the TPA provides as follows with regard to the timelines of the issuance of objection decisions:-“The Commissioner shall make the objection decision within sixty days from the date of receipt of –a.a valid notice of objection; orb.any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

33. The chronology of events in this matter is as follows:a.The Respondent issued its tax demand on the 14th June 2021. b.The Appellant lodged its objection to the assessment with the Commissioner on the 24th June 2021. c.Objection decision was issued on the 22nd of November 2021.

34. From the forgoing chronology it is clear that the Objection Decision ought to have been issued on or before the 23rd of August 2021, unless there were intervening actions that fall under section 51(11) (b) of the TPA.

35. The Respondent alleges intervening actions occurred when the Appellant submitted to it more documents and requested for the withdrawal of the assessments vide a letter dated the 5th November, 2021.

36. It also averred that there was a further intervening action on the 2nd of November 2021 when the Appellant wrote a letter to it referring to issues that were under its consideration and which also make part of this Appeal.

37. The Tribunal has looked at these two letters and its view is as follows:a.The Appellant did not submit more documents to the Commissioner vide the letter dated the 5th of November 2021. It was instead pleading with the commissioner to vacate the assessments by reminding it about some of the documents that it had provided to its officers. The relevant part of the letter stated that:‘I have annexed a document marked attachment 2 as a sample’The Tribunal holds that this did not amount to a submission of further documents.b.The letter dated the 2nd of November 2021 titled ‘request for opinion on VAT application on our business…’ was precisely that. A humble request by a taxpayer requesting for a ruling, guidance or help from the Commissioner on how to comply with the law. Paragraph 6 of the said letter reads as follows:-‘Our humble request to your good office is to seek advice/guidance on our model of business and if we have been contravening any law or act without our knowledge that have not been brought to our attention…’

38. Section 51(11) (b) of the TPA intervenes or freezes time from running if the Commissioner has specifically requested a taxpayer for documents and the said taxpayer fails and or takes inordinately long to comply. It would also come into operation if it is clear that the parties were in some form of negotiations, arbitration and or discussion pending the issuance of the objection decision. It is in these circumstances that the Commissioner would justify reason for not issuing the objection decision in time because it would be fair under the circumstances to allow the taxpayer time to supply the documents requested and / or for the parties to conclude the discussions that they are having.

39. The letters dated the 2nd and 5th of November 2022 that have been cited by the Appellant as intervening actions do not meet the threshold stated above.

40. The Tribunal therefore holds that the impugned objection decision was indeed made 70 days beyond the statutory period that is prescribed in Section 51(11) of the TPA.

41. The Superior court has held as follows in the case of Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax) (23 August 2021) (Judgment)in regard to the issue of timelines:“Section 51 (11) of the TPA is couched in peremptory terms. Having correctly found that the decision was made after the expiry of 60 days, the TAT had no legal basis to proceed as it did and to invoke article 159(2) (d).First, there was no decision at all. The decision had ceased to exist by operation of the law. Second, the provisions of section 51 (11) (b) had kicked in. The Objection had by dint of the said provision been deemed as allowed. Third, the TAT had no discretion to either extent time or to entertain the matter further. Fourth, discretion follows the law and a tribunal cannot purport to exercise discretion in clear breach of the law.”

42. The Court proceeded to state as follows in Paragraph 63 of the Judgment:“A statutory edict is not procedural technicality. It’s a law which must be complied with. Parliament in its wisdom expressly and in mandatory terms provided the consequences of failing to render a decision with 60 days. The Objection is deemed to be allowed. That being the law, the appellant’s Objection stood allowed as a matter of law the moment the Commissioner of Domestic Taxes failed to render his decision within the 60 days. This being the correct legal position, it is my finding that the 1st appeal succeeds.”

43. Following this precedent, the Tribunal is obliged to arrive at the decision that having failed to comply with the set statutory timelines, the Respondent’s Objection decision issued on 22nd November, 2021 is a nullity and the Appellant’s objection was to that extent deemed as allowed.

44. Having held that the objection decision is invalid it follows that issues (b) & (c) are rendered moot.

45. The Tribunal therefore finds that the Appellant’s objection was deemed allowed by operation of law the moment the Commissioner of Domestic Taxes failed to render its decision within the statutory period of sixty (60) days.

Final Decision 45. The upshot of the forgoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 22nd of November 2021 be and is hereby set aside.c.Each party to bear their own costs.

45. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023. ERIC N. WAFULACHAIRMANRODNEY O. OLUOCHMEMBERROBERT MUTUMAMEMBEREDWIN K CHELUGETMEMBER