[2024] KETAT 470 (KLR)

Digital Divide Data Kenya Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal 1349 of 2022) [2024] KETAT 470 (KLR) (5 April 2024) (Judgment)

Neutral citation: [2024] KETAT 470 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1349 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

April 5, 2024

Between

Digital Divide Data Kenya Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya whose core business activity is bridging the divide between economically and socially marginalized youth and sustainable employment opportunities through technology and digital skills.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued the Appellant with a demand letter and assessment notices dated 30th June, 2022 for the period 2017 to 2020 demanding total tax due from the Appellant of Kshs. 2,335,277. 00 for PAYE and a reduction of income tax losses and input VAT of Kshs. 357,597,476. 00 and Kshs. 15,353,855. 00, respectively.

4. The Appellant through a letter dated 25th July, 2022 issued the Respondent with an objection to the Respondent's tax demand and assessment notices

5. The Appellant further lodged objection application notices on iTax dated 1st August, 2022.

6. The Respondent vide a letter dated 26th September, 2022, issued its objection decision.

7. The Appellant being dissatisfied with the objection decision lodged the instant Appeal dated and filed on 21st October, 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 9th November, 2022 and filed on the same date:a.The Respondent erred in law and fact by reducing the Appellant's income tax losses resulting from an erroneous transfer pricing adjustment;b.The Respondent erred in law and fact by disallowing input VAT incurred in the making of taxable supplies contrary to Section 17 of the VAT Act, 2013; andc.The Respondent erred in law and in fact by assessing PAYE on salaries and wages related to Tanzania staff which are not subjected to tax in Kenya.

Appellant’s Case 9. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts dated and filed on 9th November, 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 30th June, 2023 and filed on 3rd July, 2023.

10. That the Appellant was established to aid in execution of the projects won by the Appellant's related party in the US, Digital Data Divide Ventures, whose principal function is winning clients, senior client management functions through the executive team, international marketing team, sales, and research and development team.

11. That the related party in the US, has been a pioneer in responsible business process outsourcing supporting clients with outsourced tasks including content conversion and data labelling.

12. That the group business model for the Appellant was set up as a non-profit, social enterprise bridging the divide between economically and socially marginalized youth and sustainable employment opportunities through technology and digital skills.

13. That the Appellant provides donor funded work study programs to Kenyans to empower under served yet talented youth through professional training and skills development to equip the youth to gain formal employment or pursue higher education.

14. That the Appellant provided the Respondent with the transfer pricing policy for the period under dispute while the Respondent conducted the audit and additionally provided a detailed value chain analysis in the Appellant's response dated 25th July, 2022 to illustrate the Appellant's functional analysis justifying the choice of transfer pricing method to remunerate its related party.

15. That the Respondent based its transfer pricing adjustment assessment to reduce the Appellant's tax losses by Kshs. 357,597,476. 00 on the fact that the Appellant's related party in the US does not carry out any functions therefore disregarding the 25:75 income split applied by the Appellant and issuing its assessment on income earned by the Appellant being fully recognized in Kenya.

16. That the Respondent did not take the Appellant's response into consideration before proceeding to issue its objection decision.

17. That the Respondent did not review the Appellant's transfer pricing policy and did not request for supporting documents such as the Appellant's contractual agreements or documentation on client engagements, to verify the 25:75 income split between the Appellant and its related party.

18. That the Appellant additionally provided the Respondent with a detailed analysis of the activities performed by the Appellant however the Respondent did not prepare a functional profile on the Appellant for the period under review.

19. The Appellant submitted that the cost borne by the Appellant's related party based in the US is roughly 25% of the full contract value using the profit split method.

20. That the Respondent's approach does not take into consideration that the Appellant apportionment of the income split to cater for costs arising from the CFO and HR resources accounted for the percentage of regional roles at the time the policy was developed.

21. The Appellant maintained that the Respondent took an unreasonable position given that the Respondent did not review the Appellant's Transfer Pricing policy to understand the arm's length nature of the income split or review any documentation to support the Appellant's selection of the Profit Split Method as the most appropriate method at the time the policy was being developed.

22. That with regard to VAT, the Respondent disallowed input VAT relating to the supply of the soap and cooking oil purchase by the Appellant as a sign of goodwill when conducting research to collecting data from interviewees.

23. That contrary to the Respondent's assertion that the Appellant's expenses were unsupported, the Appellant submitted that the expenses were supported through invoices as they are essential to the Appellant's research therefore crucial for the generation of income to enable the persons being interviewed to be more receptive to the research interview.

24. The Appellant submitted that it would be discriminatory for the Respondent to acknowledge the income generated from the research interviews while rejecting the expenses incurred wholly and exclusively in the generation of the income is a direct contradiction with the Appellant's right to fair administrative action under Article 47 of the Constitution of Kenya, 2010.

25. That the Respondent proposed to disallow Kshs. 15,353,855. 00 by reducing the Appellant's VAT refund claim of Kshs. 16,112,485. 00. That however, the Appellant submitted that it is amenable to reduction of the disallowed input VAT of Kshs. 15,353,855. 00 from the existing VAT credits currently available to the Appellant.

26. That the Appellant is not willing to concede on expenses wholly and exclusively incurred in the generation of business income for the Appellant amounting to Kshs. 31,389,526. 00.

27. The Appellant submitted that it is receptive to the Respondent reducing the disallowed VAT of Kshs. 15,353,855. 00 by the Kshs. 9,000,000 and reducing the Appellant's VAT refund claim by Kshs. 6,353,855. 00.

28. The Appellant maintained that the Respondent should not add back the expense as it was validly incurred under Section 15 of the Income Tax Act for the purpose of generating income.

29. The Appellant reiterated that the variances identified by the Respondent between salaries and wages declared under the Appellant's income tax return compared to the salaries and wages declared in the PAYE returns, related to Tanzania staff salaries which are not subjected to tax in Kenya.

30. The Appellant submitted that it is amenable to the tax relating to PAYE amounting to Kshs. 1,473,525. 00 being reduced from the VAT refund claim lodged by the Appellant for Kshs. 16,112,485. 00.

31. That the Respondent did not review documents submitted by the Appellant and therefore the objection decision filed was not fair or reasonable and lacks any factual or legal basis whatsoever.

32. The Appellant submitted that the Respondent despite acknowledging that the two entities have different roles has proceeded to conclude that 100% of the income is attributable to the Appellant showing a lack of appreciation of the Appellant and its related party, (DDD Ventures) business and general nuances around transfer pricing and its principles.

33. The Appellant further submitted that the Respondent ought to have considered the basic transfer pricing principles of function, value, risks and contribution that inform the decision to use the transactional profit split method that was employed.

34. That the Appellant in coming up with its transfer pricing policy did an in-depth review of its business process and activities with its related party taking note of the various methods used to determine arm's length and concluded that the transactional profit-split method was the best method.

35. The Appellant averred that it started with a functional analysis as prescribed by Chapter 1 Paragraph D.1. 2. of the OECD transfer pricing guidelines which is generally aimed at identifying the economically significant activities and responsibilities undertaken, assets used or contributed, and risks assumed by parties to a transaction. That in the Appellant's case this involved identifying the key success factors (and associated risks) and the main value drivers and determining how they are designed, managed and executed within the group's different organizations.

36. The Appellant urged that its analysis showed that its related party, DDD Ventures primarily acquires clients through its international sales and marketing team and performs senior management functions through its executive team.

37. The Appellant stated that it is tasked in aiding in the execution of the projects won by the related party in the US.

38. The Appellant submitted that without the important role of its related parties, there would be no work for it to do while its related party would not have the capacity to execute the contracts it wins; simply put what exists is a symbiotic relationship where both parties depend on each other for their overall benefit.

39. That the integrated roles and contributions of each party informed the use of the transactional profit split method in determining what method can be used to determine arms-length price.

40. That Chapter 2, Paragraph 2. 1.1. 9 of the OECD guidelines on Transfer Pricing recommends this method on the basis that it can offer a solution for cases where both parties to a transaction make unique and valuable contributions to the transaction, similar to the relationship of the Appellant and its related party.

41. The Appellant further took note of Chapter 4, Paragraph 4. 6.1. 4 of the UN Practical Manual on Transfer Pricing (2021) which recommends the use of the profit-split method where:a.each related party to the transaction makes unique and valuable contributionsb.the business operations of the related parties are so highly integrated that they cannot be reliably evaluated in isolation from each other,c.the parties share the assumption of economically significant risk or separately assume closely related risk.

42. The Appellant averred that through Section 18(3), Section 18(8) of the Income Tax Act and the Income Tax (Transfer Pricing) Rules, 2006 which are modelled around the OECD Transfer Pricing further reaffirmed the Appellant’s choice of transfer pricing method, which is the profit-split method that is further recognized in the Income Tax (Transfer Pricing) Rules, 2006 Rule 7 (d) and highlighted below,“(d)the profit split method, in which the profits earned in very closely interrelated controlled transactions are split among the related enterprises depending on the functions performed by each enterprise in relation to the transaction, and compared with a profit split among independent enterprises in a joint venture.”

43. The Appellant stated that when it comes to defining the profit split method, it is guided by several factors starting with primarily contributions of each party to the transaction as there are no comparables given the integrated nature of their transactions.

44. That contributions are recognized by the OECD Guidelines under Chapter 2, Paragraph C.3. 1 as valid when determining the profit split between related entities, even as a matter of equality and fairness it is only reasonable that any profits are shared as per the contribution by the parties.

45. The Appellant submitted that the 75% split of total group income in its favour, follows the OECD guidelines and the Income Tax (Transfer Pricing) Rules, (2006), and that the related party in the US plays a critical role in its overall success.

46. The Appellant stated that these are genuine business costs associated with income generation that inform the revenue split.

47. The Appellant submitted that its related party also provides executive functions exclusively through its Chief Executive Officer and his team, who determine the overall strategy such as services provided, market and clients served, where services are provided, how social impact is generated and the organization structure. Their roles are outlined below;BULLETSa.CEO - overall executive in charge, responsible for fundraising, strategy, impactb.CFO - overall responsible for finance and accounting, internal and external reporting, and liquidity & funding of group companiesc.Controller - bookkeeping, accounts payable and receivable oversight, consolidation, financial reporting and budgeting,d.President- responsible for global operations, sales and marketing, client negotiation and contracting, business developmente.Sales and marketing team - team consisting of six individuals managing clients and prospectsf.COO - globally responsible for operations teams for each of the locations, performance management, client productivity, work allocation to various locationsg.EVP operations - responsible for IT systems to support local teams: also oversees three-person business solution teams

48. That the related party, DDD Ventures, wins global clients and contracts to be executed by the Appellant. That further, the Appellant in deciding on the percentages of the profit split took into consideration the various risks shared between it and its related party through a risk analysis where it identified three main risks that is credit risk, foreign exchange and market risk.

49. That when it comes to credit risks, its related party DDD Ventures is responsible for invoicing and collections pertaining to sales to international customers who are usually creditworthy customers and consequently its credit risk is low to moderate.

50. That the Appellant bears the foreign exchange risk when it invoices DDD Ventures. That the exchange rate at the day the invoices are prepared and submitted to DDD Ventures is not the same as the exchange rate on the date of payment.

51. That market risks were also considered, which primarily included the change in market demand or change in market behaviours, through consumers changing their tastes and purchasing strategies. That this risk was found to be primarily faced by the Appellant's related party, DDD Ventures, with very minimal risks to the Appellant.

52. That another important step in coming up with a transfer policy is an economic analysis which was conducted by the Appellant during the formulation of its policy. That it involved the broad-based analysis of its business circumstances vis a vis companies within the same industry.

53. That that this realization informed its decision to use expenses incurred and the relative value added. i.e. its related party DDD Ventures performs executive, sales and marketing functions for international clients where it wins clients and signs contracts with these clients as the basis of its split.

54. That in Unilever Kenya Ltd v Commissioner of Income Tax [2005] eKLR the learned Rtd. Judge Alnashir Visram opined that:“That when several possible methods are suggested almost worldwide to arrive at arm's length prices for the purpose of taxation" In my view when the Act provides no guidelines, other guidelines should be looked al.......I was shown the Indian Income Tax (21st amendment) Rules, 2001 Rule 108 thereof sets out at length guidelines for determination of arm's length price under sub-section (2) of section 92 C of the Indian Income Tax Act. It also goes at length into computation of arm's length prices. It refers to CUP method, also to cost plus method, transactional net margin method, most appropriate method etc. Unfortunately our Act is silent on such methods to be employed or used. Section 18(3) of the Act does not tell tax payers what KRA will accept as arm's length, or bow to prove it to them or if they are willing to negotiate pricing arrangements. I do hope that KRA will lead in the initiative to make rules in this regard as India did as early as in 2001. Accordingly, and for reasons outlined, I do not think that the costs plus method used by UKL is a wrong method of arriving at an arm's length price in the particular circumstances of this case.”

55. That following the ruling, the Respondent published Transfer Pricing Guidelines, TP Rules, 2006. The Appellant averred that it followed the guidelines set out in the TP local regulations as well as internationally accepted transfer pricing regulations as set out by the OECD Transfer Pricing Guidelines.

56. The Appellant implored the Honourable Tribunal to take this opportunity to draw a line in the sand and put a stop to the Respondent's lack of urgency in interrogating and applying themselves in matters of transfer pricing as it is clear that the Appellant provided its transfer pricing policy and showcased its functions and its related party together with supporting documentation.

57. The Appellant averred that the Respondent had not disputed the roles carried out by its related party and further has not justified why it decided to recognize 100% of the profits as attributable to the Appellant alone leaving out its related party, DDD Ventures.

58. That the OECD Guidelines describe the typical process that should be followed when performing a comparability analysis. That this approach has been set out in nine steps. That the purpose of the nine-step approach is to identify where value is created with an emphasis on looking at both sides of the controlled transaction.

59. The Appellant emphasized that the Respondent failed to take into account Steps 2,3,4,6, and 8 of the nine-step approach in arriving at its conclusion that there is no value created by the related party in the US.

Appellant’s Prayers 60. The Appellant prayed that:-a.The Respondent's Objection decision dated 26th September, 2022 be set aside;b.The Appeal be allowed with costs to the Appellant; andc.Any other orders that the Honourable Tribunal may deem fit.

Respondent’s Case 61. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated 9th December, 2022 and filed on the same date together with the documents attached thereto.b.The Respondent’s Preliminary Objection raised within its Statement of Facts dated and filed on 9th December, 2022.

62. The Respondent’s Preliminary Objection raised the issue that the Appeal is bad in law and misconceived as it is against Section 52(2)of the Tax Procedures Act.

63. That this dispute is as a result of a Value Added Tax refund claim of Kshs. 17,388,026,00 which the Appellant had applied for between 2020-2021,

64. That whereas Section 24 of the Tax Procedures Act, 2015 allows an Appellant to submit tax returns in the approved form and manner prescribed by the Respondent, the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.

65. That Section 3(1) of the Income Tax Act provides that:“Subject to and in accordance with this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

66. That this provision is to the effect that the income earned by the Appellant was rightfully assessed in Kenya at 100% as opposed to the Profit Split method adopted by the Appellant since the functions carried out by Digital Divide Data Kenya and Digital Divide Data Ventures are different.

67. That based on the Transfer Pricing Policy the Appellant adopted the profit split method and the transaction applies 75:25 split between Digital Divide Data Kenya and Digital Divide Data Ventures.

68. The Respondent submitted that it is a requirement under Section 15(1) of the Income Tax Act that for an expense to be allowed for tax purposes that expense must have been incurred wholly and exclusively for the production of income taxable in Kenya.

69. That the principal laid out in Section 15(1) of the Income Tax Act is applicable internationally and is recognized under Chapter 7 of the OECD Transfer Pricing Guidelines at paragraph 7. 5 which states as follows:“There are two issues in the analysis of transfer pricing for intra-group services. One issue is whether intra-group services have in fact been provided. The other issue is what the intra-group charge for such services for tax purposes should be in accordance with the arm's length principle.”

70. That in Commissioner of Income Tax v Kencell Communications Limited (Now Airtel Kenya Limited) [2016] eKLR it was held that:“It is submitted by Kencell, and accepted by Court, that the reading of these provisions lends itself to a conclusion that Tax should be imposed on profits as opposed to Gross Income earned by the Tax Payer.”

71. The Respondent submitted that in order to determine the profit which is the taxable income of a taxpayer, the taxpayer has an obligation of providing and justifying by way of evidence to the satisfaction of the Commissioner of all its expenses.

72. That the Income Tax (Transfer Pricing) Rules, 2006, at paragraph 9, empower the Commissioner to, where necessary request a person to whom these rules apply for information, including books of accounts and other documents relating to transactions where transfer pricing is applied.

73. The Respondent averred that the Appellant was provided an opportunity to showcase that the functions performed by Digital Divide Data Ventures offered services to the Digital Divide Data Kenya which functions were necessary for the generation of taxable income in Kenya which it failed to do. That it is not enough for the Appellant to just have a transfer pricing policy.

74. That the Appellant's application for input VAT was disallowed as the application had not met the mandatory provisions of Section 17 of the VAT Act.

75. That Section 17(1), (2) & (3) of the Value Added Tax Act provides as follows:“(1)Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), the person does not hold the documentation referred to in subsection (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.(3)The documentation for the purposes of subsection (2) shall be-(a)an original tax invoice issued for the supply or a certified copy;(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;(d)a credit note in the case of input tax deducted under section 16(2);or(e)a debit note in the case of input tax deducted under section 16(5).”

76. The Respondent averred that after a review of the supporting documents provided it shows that the inputs were disallowed as they were either unsupported or prohibited.

77. That during the review of the documents the Respondent noted that the Appellant was unable to provide an explanation of why some deliveries of cooking oil were made to a non-governmental organization. That therefore, it is the Respondent's view that the expenses were not wholly and exclusively incurred thus being disallowed.

78. That the Respondent in the objection decision acknowledged the Appellant's request in its objection, which stated;“We note that you have conducted a review of the Taxpayer's VAT declarations and have pointed out that unsupported/prohibited input amounting to Kshs. 15,353,855 shall be disallowed and reduced from the VAT credits. We contend to the above, however we request that the amount be reduced from the VAT refund claim lodged of Kshs.16,112,485. ”

79. That it would therefore be disingenuous for the Appellant to later claim in its Memorandum of Appeal that the Respondent erred in law and fact by disallowing input VAT contrary to Section 17 of the Value Added Tax Act.

80. That in response to the matter of PAYE, the Respondent averred that Section 5(1)(b) of the Income Tax Act provides that employment income includes a non-resident person in respect of any employment with or services rendered to an employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not so resident.

81. That the Respondent relied on Section 49(2) of the Employment Act which provides that payments by an employer under that Section shall be subject to statutory deductions which includes PAYE.

82. That the Appellant claimed that wages and salaries related to Tanzania staff are not subjected to tax in Kenya which is contrary to statutory provisions.

83. That Epix Investments Limited v Commissioner of Investigation &Enforcement (Income Tax Appeal E019 of 2020) [2021] KEHC 184(KLR)(Commercial and Tax) (29 October 2021) (Judgment) held that the employees obtained gains in form of wages, salary, fees, commission, bonus, or subsistence, travelling, entertainment or other allowance received in respect of employment or services rendered and compliance with Sections 3, 5 & 35 of Income Tax ought to pay PAYE as held.

84. That additionally, in the objection the Appellant, it stated that it conceded to the amount of Kshs. 2,335,277. 00 being due which was acknowledged by the Respondent in the objection decision but, however, in the Memorandum of Appeal the Appellant submitted that as a ground of Appeal, PAYE is not subjected to tax in Kenya.

85. The Respondent averred that the Appeal is defective and is against Section 52(2) of the Tax Procedures Act that states;“A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

86. That in the case of Hewlett Packard East Africa Ltd v Commissioner of Domestic Taxes [2019] eKLR the Court upheld the decision of the Tribunal in striking out the Notice of Appeal whereby there were unpaid undisputed taxes thus invalidating the Appeal. That the Court stated clearly from that passage, in the Tribunal's judgment, it becomes clear that by the time the Appellant filed a Notice of Appeal before the Tribunal there was unpaid undisputed taxes which the Appellant was seeking to offset against an overpayment in VAT. That this means the Appellant was in breach of Section 52(2)of the TPA.

87. That in this case the Appellant conceded to the amount due and wanted it to be set off against the refund payable meaning there was no tax in dispute.

88. The Respondent averred that it is trite that the Commissioner's determination of tax deficiencies are presumptively correct and the presumption remains so until the Appellant produces competent and relevant evidence to support its position.

89. That the Appellant thus failed to meet the burden of proof contrary to Section 56(1)of the Tax Procedures Act which provides that in any proceedings, the burden shall be on the Appellant to prove that a tax decision is incorrect.

90. That the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts are unfounded in law and not supported by evidence.

91. That the Respondent is empowered under Section 59 of the Tax Procedures Act and Section 43 of the Value Added Tax Act to require the production of documents and information to enable the Commissioner ascertain tax liability of a person.

92. The Respondent reiterated that the Appellant has failed to discharge its burden of proof in proving that the Respondent's tax decision is incorrect as per the provisions of Section 56(1) of the Tax Procedures Act.

93. The Respondent stated that the confirmed assessment issued is proper and the same should be upheld.

Respondent’s Prayers 94. The Respondent prayed that:a.The Respondent's Objection decision issued on 26th September, 2022 being income tax additional assessments for the period 2015-2020 with a loss reduction amounting to Kshs. 357,597,476, VAT credit of Kshs. 15,353,855 and PAYE of Kshs. 2,335,277 as properly issued and to uphold the same.b.That this Appeal be dismissed with costs to the Respondent as the same lack merit.

Issues For Determination 95. The Tribunal having carefully considered the pleadings, submissions and documentation filed by both parties is of the view that the issues falling for its determination are:-a.Whether there is a valid Appeal before the Tribunalb.Whether the assessments by the Respondent were justified

Analysis And Findings 96. The Tribunal having established the issues for its determination, proceeded to analyse each of them as hereunder.a.Whether there is a valid Appeal before the Tribunal

97. This dispute arose from the Respondent’s action of raising assessments based on transfer pricing adjustments, unsupported expenses, unsupported/ prohibited VAT inputs and untaxed Tanzania staff salaries. Further, the Respondent stated in its Preliminary Objection, that the Appellant was in contravention of the provisions of Section 52 of the Tax Procedures Act in relation to tax not in dispute.

98. On its part, the Appellant averred that the Respondent disregarded its Transfer Pricing policy and that its expenses were wholly and exclusively incurred in generating its income. The Appellant further stated that the amounts that it conceded to should be offset against its VAT refunds payable.

99. The Tribunal, in dealing with the Respondent’s Preliminary Objection, reviewed the Appellant’s objection and noted that it was manifestly clear that the Appellant conceded to disallowed input VAT amounting to Kshs. 15,353,855. 00 and PAYE amounting to Kshs. 2,335,277. 00.

100. The Tribunal further noted that the Appellant requested for these conceded amounts to be offset from its VAT refund claims. The Tribunal also established that the approved refund that was payable to the Appellant amounted to Kshs. 4,109,560. 00; a fact that is not disputed by either party.

101. Additionally, the Tribunal noted that the Appellant alluded to further VAT refund claims that were still active but not approved amounting to Kshs. 4,656,704. 00 and Kshs. 7,346,221. 00 on the basis of which the Appellant requested for a set off of the conceded amount from these two claims.

102. Section 52 of the Tax Procedures Act on “Appeal of appealable decision to the Tribunal” provides as follows:“(1)A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013).(2)A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

103. The Tribunal is alive to the fact that the Appellant in its objection conceded to disallowed VAT and PAYE which the Appellant requested for an offset against its VAT refunds. The Tribunal, on review of the parties’ pleadings, noted that the only refund amount that the Respondent had approved as recoverable amounted to Kshs. 4,109,560. 00. The conceded amounts total Kshs. 17,689,132. 00 consisting of disallowed input VAT amounting to Kshs. 15,353,855. 00 and PAYE amounting to Kshs. 2,335,277. 00.

104. The Tribunal posits that even if the Respondent opted to offset the conceded amounts against the approved VAT refund, the refund amount would not be sufficient to offset the tax not in dispute in line with Section 52 of the Tax Appeals Tribunal Act. The end result being that the appeal before the Tribunal does not satisfy the requirements of Section 52 of the TPA.

105. The Tribunal makes reference to its holding in TAT 164 of 2018, Mobius (K) Ltd. vs. Commissioner of Domestic Taxes where it found as follows:“However as at the time of lodging its Notice of Appeal, the Appellant had not paid nor did it enter into any consensual payment plan, with the Respondent in respect thereof. In the eyes of this Honorable Tribunal, it has the effect of rendering the appeal incompetent and unsuitable as per the provisions of Section 52(2) of the Act. Accordingly, we find that the appeal herein is not properly before this tribunal.”

106. Similarly, Justice Mary Kasango at the High Court in Hewlett Packard East Africa Ltd. vs Commissioner of Domestic Taxes 2019 held as follows regarding undisputed taxes:“In the end it follows that this court having determined that the Appellant's Appeal is not in compliance with Section 52(2) of the Tax Procedures Act Nos I, 2 and 3 of this Appeal are dismissed because the Appeal before the Tribunal was incompetent in view of Section 52(2) of the TPA and having been incompetent no Appeal can lie on those grounds before this court.”

107. As a result of the foregoing the Tribunal finds that the instant appeal is invalid as it did not meet the provisions of Section 52 of the Tax Procedures Act.a.Whether the Respondent’s assessments were justified1. The Tribunal having found that this Appeal is invalid did not did not delve into the second issue for its determination as it was rendered moot.

Final Decision 109. The upshot of the foregoing analysis is that the Appeal is incompetent and unsustainable in law. Consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby struck out.b.Each Party to bear its own costs.

110. It is so ordered.

DATED and DELIVERED at NAIROBI this 5th Day of April, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH -MEMBERABRAHAM K. KIPROTICH - MEMBERTIMOTHY B. VIKIRU - MEMBER