[2023] KETAT 959 (KLR)

Ennus Company Limited v Commissioner of Domestic Taxes (Tax Appeal 1014 of 2022) [2023] KETAT 959 (KLR) (10 November 2023) (Judgment)

Neutral citation: [2023] KETAT 959 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1014 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, BK Terer & W Ongeti, Members

November 10, 2023

Between

Ennus Company Limited

Appellant

and

The 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 whose principal business is public transport service by road operating as a Sacco in North Kinangop, duly licensed and regulated by NTSA.

2. The respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act and the Kenya Revenue Authority is mandated with the responsibility of assessing, collecting, receipting and accounting for tax revenue. The respondent is also mandated with the responsibility of the administration and enforcement of the tax statutes as set out in the Schedule to the Act.

3. The dispute subject of this appeal arose when the respondent conducted a compliance verification exercise on the appellant ‘s VAT declarations, upon which it issued a pre-assessment demand notice dated August 25, 2020, whereby it informed the appellant of the variance between the sales declared in the VAT and income tax returns and the audited accounts for January 2017 to December 2017. The variance observed by the respondent for this period being Kshs 11,564325. 00.

4. The respondent stated that it observed a similar variance for the year 2018 amounting to Kshs. 12,034,526. 00, which the respondent charged VAT on the variance and raised on March 18, 2020 on iTax, VAT assessments for 2018 amounting to Kshs. 1,925,524. 00.

5. The appellant lodged its objection on March 1, 2022.

6. The respondent after the review of the objection, in it its objection decision dated April 1, 2022, partially allowed the appellant’s objection and deducted from the variance a sum of Kshs. 1,246,400. 00 and consequently adjusted the VAT assessment downwards by Kshs. 199,424. 00. The respondent revised the variance to Kshs. 10,788. 126. 00 charged VAT thereon and confirmed as taxes due a sum of Kshs. 1,726,100. 00, inclusive of penalties and interest.

7. The appellant being dissatisfied with the respondent’s objection decision filed its notice of appeal with the tribunal on September 16, 2022.

The Appeal 8. The appellant filed its memorandum of appeal on September 16, 2022 and set out the following grounds of appeal;(i)That during the year 2018 the appellant ‘s main business was transport of passengers by road whose income is services exempted from VAT under section 35 (7) of the VAT Act.(ii)That even if the appellant was eligible for VAT, the income amount that can be subjected to the debate of VAT qualification is office management fees of Kshs. 525,700. 00 translating to VAT of Kshs. 84,112. 00. (iii)That the appellant has already paid Kshs. 200,000. 00 to cater for any tax that may be due for payment and is not in dispute as stipulated in section 3 (b) of the Tax Procedures Act.(iv)That the commissioner confirmed the assessment, without due regard to the provisions of the repealed VAT Act, the facts and the circumstances of the case.(v)That the commissioner did not consider the information and explanations provided thereby failing to appreciate all the issues placed before him before arriving at the additional assessment in the appellant’s case.(vi)That failure by the commissioner to consider all the facts and information and evidence provided to him by the appellant is tantamount to breaching the rules of fairness and natural justice.

The appellant's Case 9. The appellant has set out its case on(a)Its statement of facts dated September 14, 2022 and filed on September 16, 2022, and(b)The written submissions dated April 12, 2023 and filed on same date.

10. The appellant stated that it is a limited liability company which was incorporated in Kenya on May 29, 2012 and has ten shareholders. The main objective of the company being to carry on the business as transporters, distributors, exporters and carriers of passengers, goods and all types of merchandise for reward. The appellant further stated that the company conducts its business as a matatu Sacco, and apart from the 10 shareholders, other matatu owners bring their vehicles in the fleet and are charged fees to become members and facilitate their vehicles to operate under the Sacco. The members contribute funds to run the office and the balance is taken up as savings. The Sacco also collects insurance premiums on behalf of Direct Line Insurance Company on commission to boost its business income.

11. The appellant stated that the variance between turnover as declared in the company annual financial statements and expected income in VAT return for the same period gave rise to the subject assessment and on March 18, 2022, the respondent issued notice of assessment based on the difference between gross company turnover for the 2018 and expected VAT based on the same amount.

12. The appellant further stated that on the said March 18, 2022 the respondent issued an additional assessment of Kshs. 2, 637,968. 00 which was 16 % of gross sales of Kshs. 12,034,526. 00.

13. The appellant further stated that on March 23, 2022, the respondent issued agency notices to the appellant’s banks and another to the bankers of Samuel Mwangi Kimani who is one of the appellant’s Directors.

14. The appellant averred that it then objected to the respondent’s assessment, which objection the respondent partially accepted by allowing non-vatable income of Kshs. 1,246,400. 00 translating to a reduction of the tax assessment by a sum of Kshs. 199,424. 00. The appellant further averred that it paid a sum of Kshs. 200,00. 00 for the tax not in dispute as per the provisions of the TPA.

15. The appellant also averred that the respondent raised another amended assessment of Kshs. 1,726,100. 00 plus penalty and interest.

16. It was also an averment of the appellant that apart from its own passenger vehicles, other company income was contributions by members, and the appellant did not engage in any vatable business. It also asserted that what the respondent contended in its decision as income earned by the appellant was vatable management fees was not factually correct, stating that the only income the appellant collected from the general public /non-members was fare, insurance commission and contributions from members.

17. The appellant submitted that contrary to the respondent’s assumption, out of the Kshs. 12,064,525. 00 it collected in the year 2018, the only income that can be subjected to VAT is management fees of Kshs. 525,700. 00. 00.

18. It further submitted that between January 2019 and December 2020, the appellant’s financial position was very bad and it was unable to distribute money collected from new members, but in March 2021 the business picked and it managed to distribute funds to members.

19. The appellant further averred that contrary to the respondents assertion, out of the total funds it collected, its income was very little, as substantial amount was given back to members who had brought their vehicles to be managed by the appellant.

20. The appellant submitted that the income breakdown the respondent is relying on as a basis of assessment for the VAT amount cannot be relied upon since these were estimates, and the same were replaced by the audited financial statements. The appellant also asserted that it had given the respondent all information he required in order for the parties to settle the matter under ADR.

21. By reason of the foregoing the appellant prays that the respondent ‘s objection decision dated April 1, 2022 be set aside and its appeal be allowed.

The respondent's Case 22. The respondent has set out its case on;(a)Its statement of facts dated October 18, 2023and filed on the same date; and(b)The written submissions dated May 19, 2023 and filed on May 22, 2023.

23. The respondent stated that it conducted a compliance verification exercise on the appellant ‘s VAT declarations and issued a pre-assessment demand notice dated August 25, 2020 where the appellant was informed of the variances between sales declared in the VAT and income tax returns and the audited accounts for the year ending December 2017. The variances observed for this period was Kshs. 11,564,325. 00.

24. The respondent further stated that it also noted a similar variance for the 2018 amounting to Kshs. 12,034,526. 00, and charged VAT on this variance and raised on March 18, 2020, on iTax, VAT assessments for year 2018 amounting to Kshs. 1,925,524. 00

25. The respondent also stated that it allowed the appellant to lodge a late objection on March 17, 2021, and requested for the following documents;(i)NTSA registration certificate (license) and list of appellant’s fleet of motor vehicles showing the registration numbers and owners;(ii)Audited accounts for the period 2017 -2018;(iii)Minutes of the appellant’s monthly meetings for the period 2017;(iv)Bank statements for the period 2017-2018.

26. The respondent stated that in the course of the review of the objection, the appellant furnished it with audited accounts, bank statements, NTSA Sacco profile, list of fleet of vehicles under the appellant’s Sacco, Sacco board minutes for 2017, and a breakdown of the appellant’s transport income for year 2017 and 2018.

27. The respondent averred that after reviewing the objection in light of the documents provided by the appellant, the respondent partially allowed the appellant’s objection and deducted from the variance Kshs. 1,246,400. 00 and consequently adjusted the VAT assessment downwards by Kshs. 199,424. 00 as it related to income purely derived from transport which was exempt from VAT.

28. The respondent stated that it revised the variance to Kshs. 10,788,126. 00 charged VAT thereon and confirmed as taxes due Kshs. 1,726,100. 00 inclusive of penalties and interest.

29. The respondent submitted that at all material times the appellant was eligible for VAT but states that it was dormant with regard to VAT in the relevant period.

30. The respondent further submitted that in cases where a taxpayer in a given period makes taxable supplies whose value is five (5) million shillings or more, but is registered later, by itself or by the respondent, the subsequent registration operates retrospectively to make the taxpayer liable for VAT in respect of amounts received before registration under section 34 (7) of the VAT Act.

31. The respondent relied on the case of Commissioner of Domestic Taxes v Galaxy Tools Ltd (2021) eKLR.

32. The respondent stated that the upshot of the foregoing is that even if the appellant was not registered for VAT the subsequent registration would render the appellant liable for VAT as regards the period the appellant was not registered.

33. The respondent also submitted that the respondent is not bound by a tax return or information provided by, or on behalf of, a taxpayer and the respondent may assess a taxpayer‘s tax liability using any information available to the respondent.

34. The respondent averred that having realized that the appellant was providing vatable management services to the owners of the vehicles operating under its Sacco, rightly assessed the appellant for VAT.

35. The respondent submitted that it was incumbent upon the appellant to clearly demonstrate that the income received was entirely from supply of exempt goods or services as provided for under section 56 (1) of the TPA, which places the burden on the respondent to prove the respondent was wrong.

36. It was a further submission of the respondent that the appellant failed demonstrate that the entire of its income was derived from exempt services, and in addition failed to show precisely as regards the confirmed amounts what extent of the confirmed amounts was attributable to the exempt services and what extent was attributable to the vatable supplies.

37. The respondent also stated that the appellant presented the notes to its financial statements showing different sources of income. The said notes showing that the appellant received official service fees amounting to Kshs. 525,700. 00 in 2018 and nothing more. The respondent further contended that the notes to the financial statements is not supported by invoices, receipts, agreements, bank statements or any other proof that indeed that was the exact amount that the appellant received as regards the management fees.

38. The respondent reiterated that the burden of proof is on the appellant to show that the actual amounts that are supposed to be taxed in line with section 56 (1) of the TPAand section 30 of the TAT Act. In addition, section 61 of the VAT Act states that in any proceedings relating to VAT the burden is on the taxpayer to show the supplies made are exempt. The appellant also had a duty of keeping full and accurate accounts of every transaction that it engaged in as provided for under section 43 (1) of the VAT Act and Section 23 (1) of the TPA.

39. The respondent further submitted that it considered the information which the appellant provided during the review. In light of that information the respondent revised downwards the tax payable from Kshs. 1,925,524. 00 to Kshs. 1,726,100 00, the reason being that the appellant managed to show by documents presented during the review that Kshs. 1,246,400. 00 was income derived from exempt transport services.

40. It was a further submission of the respondent that the appellant failed to provide documents that the rest of the income exclusively emanated from exempt supplies or to what extent the income emanated from exempt supplies.

41. The respondent also submitted that the income earned by the appellant to the extent that it was earned from management services to the owners of PSV motor vehicles is not exempt from VAT tax as contended by the appellant.

42. The respondent further submitted that the management services offered by the appellant to the owners of PSV’s motor vehicles operating under its Sacco are taxable supplies which are not exempt from VAT under the VAT Act.

Issues for Determination 43. The Tribunal having reviewed and carefully considered the pleadings and submissions made by the parties, is of the considered view that the appeal herein distils into one issue for determination;Whether the respondent was justified in assessing the appellant for amounts received from the matatu operators as a non-exempt supply under the VAT Act.

Analysis and Determination 44. The dispute herein arises out of assessments arising from a compliance verification exercise conducted by the respondent on the appellant’s VAT declarations. The respondent averred that the exercise revealed that the appellant’s income tax returns and VAT declarations exhibited variances, and the respondent proceeded to issue additional assessments charging the variances on VAT.

45. The appellant objected to the assessment on the grounds that it was not dealing with vatable supplies. The respondent contended that the 2018 turnovers exhibit a variance of Kshs. 12,034,526. 00 which translated to VAT principal tax of Kshs. 1,925,524. 00.

46. The appellant in its responses stated that its principal activity is the provision of transportation services of passengers through public means commonly known as PSV, and also contended that the services it offered are exempt from VAT as per the First Schedule of the VAT Act 2013 which provides at Paragraph 7 as folows:-“Transportation of passengers by any means of conveyance excluding international air transport or where the means of conveyance is hired or chartered “.

47. The respondent averred that in the course of the objection review, the appellant furnished it with its audited accounts, bank statements, NTSA Sacco profile, list of all vehicles under its Sacco fleet, Sacco Board Minutes for 2017, and breakdown of transport income for 2017 and 2018.

48. The respondent further averred that upon review of the documents provided by the appellant, it noted that the appellant offered transport services and management services to PSV owners, who had the burden of ensuring that the vehicle was functional, roadworthy and met regulatory requirements. The appellant on its part ensured that the fleet of vehicles in the company operated at designated routes, and used pick up and drop off points in an orderly manner, supervised the drivers and conductors, and resolved any operational issues, and for this service, the PSV owners paid a daily fee to the appellant.

49. The respondent contended and submitted that the service offered by the appellant to the PSV owners had the hallmark of a management service, which is taxable under the VAT Act.

50. The respondent also contended that it noted that some motor vehicles were owned by the appellant and in respect to 2018 income, partially accepted the objection by allowing income of Kshs. 1,246,400. 00 with VAT of Kshs. 199,424. 00 relating to purely transport income, and rejected Kshs. 10,788,126. 00 with VAT of Kshs. 1,726,100. 00 relating to management services.

51. The Tribunal notes that, the first schedule to the VAT Act, Paragraph 7 provides as thus:-“Transportation of passengers by any means of conveyance, including international air transport or where the means of conveyance is hired or chartered”

52. The VAT Act Section 2 describes exempt services as;“Exempt services means supplies specified in the first schedule which are not subject to tax.”

53. It is noteworthy that the appellant owned some vehicles which earned income from transport business which is exempt from VAT tax. The respondent has demonstrated that it considered this and as a result partially accepted the appellant ‘s objection and adjusted the variance allowing the amount that had been earned from transport income and is exempt under the First Schedule of the VAT Act, Paragraph 7, thus reducing the appellant’s liability from Kshs. 1,925,524. 00 to Kshs. 1,7226,100. 00.

54. However, it is clear that the appellant did not own all the vehicles that were used in its transportation business, and did not collect income from transportation service. It simply managed the fleet of vehicles owned by others and operated in the company at designated routes, then the PSV owners paid the appellant a daily fee. It was therefore not in doubt that the appellant offered management services to PSV owners of motor vehicles in the Sacco.

55. Having carefully considered the structure of the appellant’s business model, the Tribunal arrives at the conclusion that the income earned by the appellant, to the extent that it was earned from management services to the owners of PSV motor vehicles managed by the appellant, is not exempt from VAT as the appellant contended.

56. Therefore, flowing from the foregoing, the Tribunal is satisfied that the management services offered by the appellant to the owners of PSVS operating under its Sacco are taxable supplies which are not exempt from VAT under the Act.

57. In the case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB 64 as applied in T.M. Bell v Commissioner of Income Tax [1960] EALR 224 where Roland J. stated that:-“In a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing it to be implied. One can only look fairly at the language used. If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be.”

58. In light of the foregoing the Tribunal finds and holds that the respondent was justified in assessing the appellant for management services as a non-exempt supply under the VAT Act.

59. The upshot of the foregoing is that the Appeal lacks merit and consequently fails.

Final Decision 60. The appeal having failed the tribunal makes the following orders;(a)The appeal be and is hereby dismissed.(b)The respondent‘s objection decision dated the April 1, 2022 be and is hereby upheld.(c)The parties to bear their own costs.

61. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF NOVEMBER, 2023ROBERT M. MUTUMA.....................CHAIRPERSONELISHA N. NJERU....................MEMBERMUTISO MAKAU....................MEMBERBONFACE K. TERER...............MEMBERDR WALTER ONGETI............MEMBER