[2023] KETAT 154 (KLR)

Equity Insurance Agency Limited v Commissioner of Domestic Taxes (Appeal 628 of 2021) [2023] KETAT 154 (KLR) (Civ) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 154 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 628 of 2021

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

March 17, 2023

Between

Equity Insurance Agency Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a private limited company whose principal business is procuring insurance customers for its principals , underwriters

2. The Respondent is a principal officer appointed under the Kenya Revenue Authority Act, Cap 469 of the Laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenues. Further, under Section 5 (2) of the Act with respect to the performance of its functions under subjection (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 of the Act for the purpose of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The dispute herein arose from a compliance check that was carried out by the Respondent on the Appellant’s tax affairs for period 2015 to 2018. Following the review, the Respondent raised an additional assessment for Corporation Tax, Withholding Tax, VAT and Excise Duty through a letter dated 27th December 2019 as here below:-Tax headPrincipal TaxKshsPenalty KshsInterest KshsTotal KshsCorporationTax48,855,1775,537,61443,199,68097,592,471WithholdingTax2,820,677141,0341,200,2964,162,007VAT13,167,001658,3501,952,78115,778,132Excise Duty118,773,3765,938,66929,701,517154,413,562Total183,616,23212,275,66776,054,274271,946,172

4. The Appellant objected to the assessment vide its notice of objection notice dated the 24th of January 2020. This resulted in several correspondences and meetings between the parties which culminated in the issuance of the objection decision on the 27th of August 2021 wherein tax demanded was partially vacated as thus:Tax headPrincipal TaxKshsPenalty KshsInterest KshsTotal KshsExcise duty83,855,0794,192,75420,354,168108,402,001CorporationTax31,324,7814,665,21934,999,16270,989,162WHT2,304,393123,3331,099,99753,527,701VAT13,167,001658,3501,952,78115,778,132Total130,651,2549,636,65658,406,086198,696,996

5. The Appellant conceded to the VAT assessment and settled the principal sum of Kshs 13,167,001. 00 and filed an appeal in regard to other heads of tax namely Excise duty of Kshs 108, 402,001. 00 Corporation tax of Kshs 70,989,162 and Withholding tax of Kshs 3,527,132. 00.

The Appeal 6. The Appellant filed a Memorandum of Appeal dated 8th of October 2021 with the grounds of appeal itemized under each tax head as follows:a.Excise Dutya.That the Respondent erred in law and misdirected itself in demanding excise duty on commissions that are clearly premium based and which are expressly exempted from excise duty by the Excise Duty Act, 2015;b.That the Respondent has erred in law and without prejudice adopted a narrow and limited interpretation of the definition of the term ‘premium. based or related commissions as used in Part III of the First Schedule to the Excise Duty Act. 2015;c.That the Respondent erred and misdirected itself in demanding excise duty from the Appellant on revenue which the Appellant had charged excise duty; andd.That the Respondent erred and misdirected itself in demanding excise duty from non-existent income arising from withholding tax reconciliation.b.Corporation Taxa.That the Respondent erred and misdirected itself in purporting that the Appellant under declared its commission income and in demanding corporation tax from the Appellant on the basis of duplicated withholding tax certificates.b.That the Respondent erred and misdirected itself in demanding corporate income tax from the Appellant in relation to excise duty paid by the Appellant. Particularly the Respondent in demanding corporate income Tx on excise duty that has already been remitted to it; andc.That the Respondent erred in law in failing to consider the Appellant’s tax overpayment for the 2014 year of income of Kshs 29,524,952. 00 while computing the corporate income tax assessment.c.Withholding Taxa.That the Respondent erred in law and misdirected itself in demanding withholding tax on the purchase of software by the Appellant; andb.That the Respondent erred in law and in fact in demanding withholding tax on share of office costs allocated to the Appellant by Equity Bank Kenya Limited.c.That the Respondent erred in law and fact in demanding withholding tax on recharged for professional fees on which withholding tax had already been accounted for.d.That the Respondent erred in law and misdirected itself by retrospectively applying penalty under Section 83A of the Tax Procedures Act to a period when such a penalty was not provided for in law. The penalty charged has no legal basis for the period January 2015-September 2018 and therefore ought to be quashed.

Appellant’s Case 7. The Appellant’s case is premised on its Statement of Facts dated and filed on 8th October, 2021 and written submissions dated and filed on the 9th June, 2022 together with the authorities filed therewith.

8. The Appellant’s contentions on this matter is that:a.paragraph 4 of part II of the First Schedule to the Excise Duty Act provides that excise duty on other fees charged by financial institutions shall be ten percent of their excisable value.b.Paragraph III of the First Schedule to the Excise Duty Act defined ‘other fees’ to include:‘any fees, charges or commissions charged by financial institutions relating to their licensed activities, but does not include interest on loan or return on loan or any share of profit or an insurance premium or premium based or related commissions.’c.The basis for the Respondent’s assessment of the override commission was because the amount was over and above the normal insurance commissions prescribed in the Act.d.The Respondent’s premise of taxation was erroneous because no reference was made to the Insurance Act in the definition of ‘other fees’; and that the only condition in the EDA is that the commission must be a premium based or related to commission.e.Its override commissions are premium based or related commissions and are thus exempt from excise duty because they are computed based on the premiums generated by the Appellant and are earned for providing the essential services of business acquisition, performance of risk analysis and client maintenance services to the underwriter.

9. The Appellant reproduced several Service Level Agreements(SLA) to prove that the override commissions are indeed paid out of the premium.

10. The agreement between it and APA Insurance provided thus at paragraph 6. 3 and 6. 4:“6. 3 The Agency will be entitled to administrative costs and expenses incurred in the administration and implementation of this Agreement.6. 4 The Agency’s costs and expenses as referred to in clause 6. 3 above is hereby agreed between the parties and shall be ten percent (10%) in respect of all insurance programs net of the applicable review and taxes. Such agency costs shall be paid quarterly on all premiums generated and paid for , provided that this arrangement will not be applicable to medical business. Such administrative costs and expenses shall not form part of normal agency commissions agreed between the agency and the insurance company.”

11. The agreement between it and Britam Insurance provided thus at paragraph 6. 3 and 6. 4:“6. 3 The Agency will be entitled to administrative costs and expenses incurred in the administration and implementation of this Agreement.6. 4 The Agency’s costs and expenses as referred to in clause 6. 3 above is hereby agreed between the parties and shall as specifically outlines in schedule 1 attached (as amended from time to time) in respect of all premiums generated from the agreed classes of insurance net of the applicable levies and taxes. Such agency costs shall be paid monthly on premiums generated for the lasses agreed on and paid for. , Such administrative costs and expenses shall not form part of the normal agency commissions agreed between the agency and the insurance company.”

12. The agreement between it and CIC Insurance provided thus at paragraph 6. 3 and 6. 4:“6. 3 The Agency shall be entitled to recover all costs and expenses incurred by the agency in the administration and implementation of this Agreement from the premium due to the insurance company.6. 4 The Agency’s costs and expenses as referred to in clause 6. 3 above is hereby agreed between the parties and shall be five percent (5%) or all motor business and ten percent (10% for all non-motor business in respect of all premium generated from the insurance programme net of the applicable taxes and levies. Such agency costs shall be recovered by the agency directly from the premium received from customers before remitting the same to the insurance company on a monthly basis. Such recoveries of administrative costs and expenses shall not form part of normal agency commissions agreed between the agency and the insurance company.”

13. It argued that these SLA made it clear that the fees earned from these businesses were commissions paid to an agent.

14. It stated further that:a.The insurance industry considers payments made to agents/brokers as commission.b.Its external auditors considered these payments as override commissionsc.The insurance companies deducted tax on these override commissions at the rate of 10% which is the rate applicable to premium commissions.d.The Respondent should have rejected the WHT of 10% that had been paid to it if it was of the view that the fees charged on these SLAs did not constitute commissions. And that it should have instead insisted on receiving a WHT of 5% which is applicable to administrative fees.e.The override commissions and premium are related because the Appellant cannot earn income if it does not generate income for the insurance company.f.The override commission is thus exempt from tax and therefore the assessment tax of Kshs 76,561,051 should be vacated.

Appellant’s Prayers 15. The Appellant prays that;a.The appeal be allowed;b.The Tribunal be pleased to find that:i.the override commissions earned by the Appellant from insurance companies are exempt from excise duty;ii.the Respondent cannot purport to charge excise duty on revenue which the Appellant had charged excise duty;iii.the Appellant is not liable to corporate income tax and .or excise duty for the purported undeclared commission income which was occasioned by duplicated WHT certificates;iv.the Appellant is not liable to pay corporate income tax on excise duty paid from the Appellant’s commission to the Respondent;v.the Appellant is entitled to have the 2014 tax overpayment be considered in the corporate income tax assessment for the 2015 year of income;vi.Withholding tax is not due on the purchase of software;vii.Withholding tax is not due on the Appellant’s share of costs allocated by Equity Bank Kenya Limited to the Appellant; andviii.Withholding tax is not due on recharge, for professional fees for which withholding tax has already been accounted fora.It be awarded costs of this appeal.

Respondent’s Case 16. The Respondent case is premised on the Statement of Facts dated and filed 8th November 2021 wherein it affirmed that:a.The tax payable by the Appellant after conducting a compliance check of its tax affairs for the 2015 to 208 years of income and after the conclusion of the objection review was Kshs 198,696,996/=Premium Based or Related Commissionsb.The override commissions were paid on the basis of volume of business given to the insurance company. It argued that these amounts were over and above the normal insurance commission as prescribed in the Insurance Act.c.The income in contestation was described as administration fees/costs in the service level agreements.d.The override commissions in this dispute was not specifically tied to procuring business income for an insurance company by an insurance agency.Under Declared Commission Incomee.The Appellant did not avail a detailed listing of the manual withholding tax certificates to help it ascertain if some of them were cancelled. It thus relied on the Appellant’s iTax records to arrive at a reconciliation of the amounts not declared under commission income.Demand of Corporate Income Tax in Relation to Excise Duty Paid from The Appellant’s Commissionf.The Appellant had not charged Excise duty on its underwriter’s commission and sought to bear the taxes from its total commission. the Appellant’s failure to charge excise duty on commissions from their underwriters contravened the income tax and Excise Duty Acts. Section 16(2) of the Income Tax Act provided that tax expenditures as non- deductible expenses . It is for this reason that the Commissioner added back the Kshs 59,230,455 for corporate tax purposes.Failure to Consider the Appellant’s Tax Overpayments for the 2015 Year of Income Of Kshs 2,9524,952g.Pursuant to Section 47(1) of the TPA, the Appellant ought to have applied for tax refund to allow for a verification process by the Commissioner before they could be transferred and applied as tax credits for 2015 return period.WHT on Acquisition of Softwareh.The agreement between the Appellant and the owner of the software was for grant of licence to access and use the software. The Tribunal was referred to Section 35(3)(j) of the Income Tax Act which require a person to withhold tax from rent, premium or similar consideration for the use or occupation of immovable property.WHT On Shared Costs Allocated To The Appellanti.the Appellant was allocated costs in relation to the space that it shared with Equity Bank ofKemya Ltd(EBKL)

17. The Respondent argued that upon the review of the Service Level Agreement between the Appellant and Britam the clauses in the SLA revealed the nature of the override commissions:6. 3.The Agency will be entitled to administrative costs and expenses incurred in the administration and implementation of this Agreement.6. 4.The Agency’s costs and expenses as referred to in clause 6. 3 above is hereby agreed between the parties and shall as specifically outlines in schedule 1 attached (as amended from time to time) in respect of all premiums generated from the agreed classes of insurance net of the applicable levies and taxes. Such agency costs shall be paid monthly on premiums generated for the lasses agreed on and paid for. Such administrative costs and expenses shall not form part of the normal agency commissions agreed between the agency and the insurance company.

18. It relied on these clauses to argue that the commissions were paid on the basis of the volume of business given to the insurance companies and that these amounts were referred to as administrative fees/costs.

Respondent’s Prayers 19. The Respondent urged the Tribunal to:a.Dismiss the Appeal and uphold the Respondent’s objection decision dated 27th August 2021. b.Order the Respondent to pay the costs of the Appeal.

Partial Consent 20. Parties recorded a Partial Consent dated the 12th of July 2022 which was adopted as a Judgment of the Tribunal on the 13th of July 2022.

21. The Judgment recorded by consent of the parties was, inter alia, to the effect that:a.That of Kshs. 108,402,001. 00 relating to Excise duty assessment, the Commissioner shall vacate Kshs 3,939,650. 00 The outstanding Excise duty amount of Kshs 104,462,351. 00 shall be referred to TAT for determination.b.That Kshs. 70,989,161. 00 relating to Corporation tax assessment the Commissioner shall vacate Kshs 11,818,950. 00. The outstanding Corporation tax amount of Kshs 59,170,211. 00 shall be referred to TAT for determination.c.That WHT assessment has been reviewed from Kshs 3,527,701. 00 to Kshs 660,186. 00 comprising principal tax of Kshs 434,333. 00 penalty of Kshs 21,717. 00 and interest of Kshs 204,136. 00. d.That the Appellant undertakes to pay the WHT liability of Kshs 434,333. 00 in one installment upon signing of the ADR agreement.

Issues For Detrmination 22. The parties on the basis of their pleadings are generally of the consensus that the following issues fall for determination:a.Whether override commissions earned by the Appellant from Insurance companies are chargeable to excise duty.b.whether the Respondent can demand additional excise duty on a revenue that the Appellant had already charged excise duty.c.whether the Respondent is liable to pay Corporate Income Tax on non-existent revenue.d.whether the Appellant is entitled to utilize the 2014 tax overpayment to settle the Corporate Income Tax Assessment for the 2015 year of income.

23. The Tribunal has adopted the parties’ foregoing identified issues as the issues that will fall for determination in this matter.

Analysis And Detemination a. Whether override commissions earned by the appellant from insurance companies are chargeable to excise duty. 24. The issue in dispute is whether the fees earned by the Appellant from the services that it offered insurance companies were exempt from excise duty as is envisaged Paragraph III of the First Schedule to the EDA which has defined ‘other fees’ to include:‘any fees, charges or commissions charged by financial institutions relating to their licensed activities, but does not include interest on loan or return on loan or nay share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or Regulations made thereunder.’

25. The term override commissions or commission has not been used in all the three SLA’s between the Appellant and CIC, Britam and APA to describe the income that the Appellant obtained for the services it provided to the insurance companies. It has instead described these fees/income variably as follows:a.The contract between it and APA described it at clause 6. 3 as Agency’s costs and expensesb.The contract between it and Britam described it at clause 6. 3 as administrative costs and expensesc.The contract between it and CIC described it as clause 6. 3 as costs and expenses

26. The Tribunal holds the view that nothing would have been easier than for the Appellant and the insurance companies to refer or describe these considerations payable to the Appellant as commissions. This was not the case, and the Tribunal’s hands are therefore tied by the parol evidence rule which states that evidence cannot be admitted (or, even if admitted, cannot be used) to add to, vary or contradict a written instrument.

27. The parol evidence rule therefore, prohibits a Court of law and or a Tribunal from admitting extrinsic evidence to explain and or clarify the terms used or the intention of the parties in a contract.

28. The golden rule dictates that a contract (SLA) should be interpreted according to the intent of them that made it", and that "the words of the document speak the intention of the parties. In other words, the meaning of a document should be inferred from the document itself without reference to anything outside the document.

29. It is clear to us that the intention of the Appellant and insurance companies was clear and discernible from the SLAs that were signed between them. The Tribunal also taKshs. judicial notice that the Appellant and the insurance companies that signed these SLA have legal departments that are headed by counsels of great experience and repute. It would not have been possible that the counsels involved in the development and signing of these SLAs would have excluded the terms ‘commissions’ or ‘override commissions’ if such was the description of the income that was to be earned by the Appellant from these SLAs. The decision to describe these ‘incomes’ as agency/administrative costs and agency/administrative expenses was intentional and the Tribunal cannot therefore step in to vary or imply terms in SLAs that were voluntarily agreed on and signed by the parties.

30. This position found favour with the Court of Appeal in Commercial Bank Limited v Kenya Grange Vehicle Industries Limited [2017] eKLR where the court observed as follows:“So that where the intention of parties has in fact been reduced to writing, under the so called parol evidence rule, it is generally not permissible to adduce extrinsic evidence, whether oral or written, either to show the intention, or to contradict, vary or add to the terms of the document, including implied terms. Courts adopt the objective theory of contract interpretation, and profess to have the overriding aim of giving effect to the expressed intentions of the parties when construing a contract. This is what sometimes is called the principle of four corners of an instrument, which insists that a document’s meaning should be derived from the document itself, without reference to anything outside of the document (extrinsic evidence), such as the circumstances surrounding its writing or the history of the party or parties signing it. In Prudential Assurance Company of Kenya Limited v Sukhwender Singh Jutney and Another, Civil Appeal No. 23 of 2005 the Court citing a passage in Odgers Construction of Deeds and Statutes (5th edn.) at p.106 emphasized that in construing the terms of a written contract; It is a familiar rule of law that no parol evidence is admissible to contradict, vary or alter the terms of the deed or any written instrument. The rule applies as well to deeds as to contracts in writing. Although the rule is expressed to relate to parol evidence, it does in fact apply to all forms of extrinsic evidence. The supporting rationale for this rule is that, since the contracting parties have reduced their agreement to a single and final writing, extrinsic evidence of past agreements or terms should not be considered when interpreting that written contract agreement, as the parties had consciously decided to ultimately leave them out of the contract. In other words, one may not use evidence made prior to the written contract to contradict the ultimate contract that has been reduced into writing.”

31. Application of the Parol evidence rule to the matter would therefore, lead the Tribunal to the conclusion that it must give effect to the intention of the parties in their SLAs. It is clear that the intention of the parties in these SLAs was to earn an income known as agency/administrative costs or agency/administrative expenses. It would thus be inequitable to import the term ‘override commission’ into the parties SLA.

32. Secondly, the last sentence in Clause 6. 4 of the SLA between the Appellant and the APA, CIC and Britam reads as follows:Such administrative costs and expenses shall not form part of the normal agency commissions agreed between the agency and the insurance company.

33. On the face of it these words imply that the parties are already engaged in a relationship which attracts ‘normal agency commission’ and that the current SLA is in addition to or over and above the other contract which attracts ‘normal agency fees’.

34. It is clear from the SLAs that the parties have previously invoked the use of the word ‘commission’ to describe consideration payable in appropriate cases. Therefore, nothing would have been easier than for the same parties to use the same term in this contract if that was indeed their intention. They however, opted to use the term ‘agency/administrative costs or agency/administrative expenses’ shall not form part of the normal commission that had previously been agreed upon between the parties.

35. With the evidence that the Appellant and the Insurance companies have previously used the word ‘commission’ in their previous transaction, it begs the question why they opted to use the words ‘agency/administrative costs or agency/administrative expenses’ to describe the consideration payable in the present transaction. In our view nothing could have been easier than for the parties to describe the consideration arising from the SLAs under dispute as ‘commissions’ so as to make them fall under the exempt status.

36. In the circumstances, the Tribunal is of the view that the parties to the SLAs voluntarily and willingly opted to aptly describe the consideration that was emanating from their commercial relationship as ‘agency/administrative costs or agency/administrative expenses’. The parties who drafted the SLAs were well versed with the nature of income that they hoped to pay and obtain from these relationships. Their choice of words in describing these incomes as ‘agency/administrative costs or agency/administrative expenses’ was therefore calculated, well thought out and intentional.

37. The Appellant’s invitation to vary, introduce and or impute the term ‘overriding commission’ into the parties SLAs that was signed by the parties is therefore declined.Whether the respondent can charge corporate income tax and excise duty onnon-existent revenue and excise duty paid respectively

38. The Appellant’s argument on this issue was that:a.The Appellant’s business model is to charge its underwriters commissions inclusive of taxes. Consequently, the commission received by the Appellant is considered to be inclusive of excise duty, which means that the Appellant’s revenue is the Commission received less the excise duty payable.b.In the 2015 year of income, its revenue for the entire year was Kshs. 460,613,918. 00. The revenue for the period January to November 2015 was Kshs. 435,342,803. 00c.The Respondent’s argument that it should have recognized the excise duty paid of Kshs. 59,230,455. 00 as part of its income for the 2015 year of income and then charge tax thereon would mean that the Respondent wants it to include excise duty already paid as part of its income and therefore compute the taxes thereon.d.The Respondent’s corporate and excise duty assessments of Kshs. 59,230,455. 00 are based on an incorrect basis as analysed hereunder:a.Corporate Income Taxi.That the Respondent’s audited income for the period January to November 2015 was Kshs. 435,342,803. 00ii.That it recognized payment of commission as including excise duty but its income but its income as excluding excise duty. The Appellant argued that this is the common practice in the industry, and that a good example is ATM fees charged by a Bank. If the bank charges a customer ATM withdrawal fees of KSHS. 35, its income is not the KSHS. 35, but the KSHS. 35 less excise duty payable to the Respondent. It affirmed that based on this example it had correctly recognized its income without excise duty.iii.That the Respondent’s contention that the excise duty paid of Kshs. 59,230,455. 00 should be reported as part of the Appellant’s commission income was is erroneous and grossly misleading because this would amount to charging corporate income tax on excise duty, which had already been paid by the Appellant.iv.That the Respondent’s assessment was premised on the erroneous conclusion that the Appellant claimed excise duty amounting to Kshs. 59,230,455. 00 as an expense on its 2015 tax computation. Consequently, the Respondent has purported to add back the Kshs. 59,230,455. 00 in the Appellant’s tax computation for 2015. v.That this assumption is erroneous because the Appellant did not claim any excise duty as an expense in its trial balance. This can be confirmed from the Appellant’s trial balance for 2015 which does not indicate excise duty as part of the expenses/provisions claimed by the Appellant. It would therefore, be is impossible for the Appellant to add back an expense to the tax computation which is not part of the Appellant’s expenses in the trial balance.vi.That the Respondent’s basis of tax assessment was thereforeincorrect.b.Excise duty.i.That just like it is in the case in corporate income tax, the Appellant charges its underwriters’ commissions inclusive of excise duty. For the 2015 year of income it recognized its income net of excise duty paid for the year of Kshs. 59,230,455. 00. It asserts that the Respondent’s contention that the Appellant should have recognized its commission income inclusive of excise duty is erroneous.ii.That upholding the Respondent’s demand is unreasonable and illegal as it would lead to an absurd situation where the Appellant shall pay excise duty on excise duty already remitted to the Respondent.

39. Based on the foregoing reasons, the Appellant prayed that Respondent’s assessed corporate income tax and excise duty assessments of Kshs. 59,230,455. 00 ought to be vacated.

40. The Respondent’s arguments on this were as follows:a.That the Appellant claimed withholding tax credits under the tax period of 2015 and 2016. A big portion of the claimed amount related to manual withholding tax certificates. The Respondent requested the Appellant to avail a detailed listing of the withholding tax certificates as claimed in their returns to ascertain that some of them were cancelled; and some were already manually generated resulting in a double counting error and that no credit claims were made in relation to those specific certificates.b.That the Appellant did not avail all information requested thus the Respondent relied on the incomplete information available and the Appellant’s iTax records to arrive at a reconciliation of the amounts not declared under commission income.c.That the burden of proving that a tax assessment is not correct in legally placed on the Appellant under Section 56 of the TPA as read with Section 30 of the TAT Act.d.That it is thus not enough for the Appellant to merely allege that it failed to consider something, instead the Appellant ought to have asserted that it raised an issue during the objection stage and the same was ignored.e.That the amount of underdeclared commission income of Kshs. 25,918,750. 00 as established by the Respondent related to iTax certificates that were double counted as inaccurate.f.That that the Respondent did not provide it with sufficient documents to enable it consider an amendment of its assessment.

41. The Respondent argued further that:a.The Appellant had failed to deduct excise duty from its underwriters’ commission. It then sought to bear these taxes that it did not collect from its total commission.b.The fact that the Appellant failed to charge its underwriters the requisite excise duty on their commissions was obtained from the Appellant’s debit notes that it had issued to its underwriters.c.If the Appellant had charged duty on its underwriters, then the same would not have appeared as its expenses. I would have instead appeared as a consumption tax borne by the consumer clients.d.Having borne these expenses on behalf of the client meant that the Appellant acted as a final consumer who I subject to excise duty.e.The Appellant therefore ought to have reported the commission as a gross amount as tax on top of its income and not on the net income after deductions of the Excise duty that the Appellant bore on behalf of the clients.

42. Its prayer was that its assessment of Kshs. 59,230,455. 00 be upheld

43. The Tribunal notes from the record that the Respondent requested for further documents from the Appellant on two occasions vide its letters dated 19th March 2020 and 8th October 2020.

44. The Appellant responded to these letters attaching the documents requested vide its letters dated 17th April 2020 and 8th November 2020.

45. Subsequently thereafter the objection decision dated the 21st of August 2021 and which is the subject of this Appeal was issued by the Respondent.

46. The said objection decision does not indicate that it had requested for any document from the Appellant in relation to issue of charging corporate income tax and excise duty and that such documents were never supplied by the Appellant.

47. The Tribunal notes that apart from the Respondent’s letters dated the 19th March and 18th October 2020 that the Respondent has not presented any document in the form of an e-mail or a letter before the Tribunal to show that it had requested the Appellant for any specific document and that the said document was not delivered.

48. This means that Respondent’s contention that it had requested for documents from the Appellant in regard to this issue and that the same was not provided to enable it re-consider its assessment is misleading and not supported by evidence. That argument and contention therefore fails and the Tribunal reverts to the issue on whether the Appellant erred its tax assessment in regard to the provisions for the excise duty paid and amounting to Kshs 59,230,455. 00.

49. The Tribunal discerned that issue revolves around the application of Sections 15(1), (2)(a) and 16(1)(a) of the Income Tax Act in determining the taxable income of a person. The relevant portions of Section 15 read in part as follows:“(1) For the purpose of ascertaining the total income of any person for a year of income there shall, subject to Section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income,…(2) Without prejudice to sub-Section (1) of this Section, in computing for a year of income the gains or profits chargeable to tax under Section 3(2)(a) of this Act, the following amounts shall be deducted:”

50. On the other hand, Section 16 (1) (a) provides as follows:“161)Save as otherwise expressly provided, for the purposes of ascertaining the total income of a person for any year of income, no deduction shall be allowed in respect of— (a) any expenditure or loss which is not wholly and exclusively incurred by him in the production of the income; …2)Notwithstanding any other provision of this Act, no deduction shall be allowed in respect of :(a)....................(b).....................(c)any income tax or tax of a similar nature paid on income:”

51. It is discernible from the provisions of Sections 15 and 16 of the Income Tax Act that:a.Taxable income of a person is ascertained from the deduction of the allowable expenditures from the total income of a taxpayer.b.Before any expenditure can be deducted from a person’s taxable income it:i.ought to have been exclusively incurred in the production of the said income.ii.Should be listed under Section 15(2) (a -ab).

52. The question is what is the Appellant’s taxable income and can the excise duty amounting to Kshs 59,230,455 be included as an allowable deduction in the ascertainment of the Appellant’s income.

53. Its apparent from the law that tax is payable on net income from where all allowable expenses have been deducted.

54. The Tribunal has perused Section 15(2) of the Act and it is unable to find tax paid on behalf of clients as being part of the allowable expenses.

55. The Tribunal’s reading of this situation is that the appellant could only have paid this tax from its revenue. The fact that such payment is not recognized as an allowable deduction implies that any tax paid on behalf of another taxpayer shall form part of the other taxpayer’s taxable income.

56. Section 16(2)(c) of the ITA provides that only allowable expenses can be deducted from the income of a tax payers’ income. In fact, Section 16(2) (c) is explicit that income tax or tax of a similar nature paid on income is a non- allowable deduction.

57. It follows therefore, that the Appellant’s attempt to deduct to excise duty paid of Kshs 59,230,455 from its revenue to reduce its corporate tax liability directly contravenes Section 16(2) (c) of the ITA; and Section 15(2) which have excluded it as allowable deduction that is allowed in ascertainment of total income.

58. To bolster that line of argument the Tribunal refer to the binding decision of the High Court in Republic v Commissioner for Income Tax & another Ex- Parte Stockman Rozen (K) Limited [2015] eKLR where Odunga, J. held:“ … taxable income is that income that has accrued minus allowable deductions and that the said deductions from the accrued income must be those that are allowable under Sections 15(1) and (2) of the Act which includes bad debts at Section 15(2)(a)

59. The Tribunal shall now move to make a determination in regard to compliance with Section 15(1) of the VAT Act on whether expenditure was incurred wholly and exclusively for the purpose of the trade.

60. The superior court has stated in Mars Logistics Limited v Commissioner of Domestic Taxes [2021] eKLR that an expenditure would be deemed to have been incurred wholly and exclusively for the purpose of trade and hence deductible if the expenditure has some connection to the income-earning operations of the taxpayer.

61. The Tribunal’s finding is that the excise duty paid by the Appellant on behalf of its customers/clients was not incurred with an aim of producing income to its business. It was incurred in compliance with its statutory liabilities and obligations under Section 16 of the TPA.

62. The fact that it was incurring a compulsory expense that had been dictated to it by statute affirms that its intention was to honour the statutory obligation and not to engage in an activity that is geared towards producing income for the business.

63. The Appellant has also not pleaded that it paid this tax payment in an effort aimed at a whole and exclusive promotion of its trade. Evidence has also not been adduced to attest to such a case.

64. Based on the above analysis its clear to the Tribunal that a wholesome reading of Sections 15(1), 15(2), 16(1) and 16(2)(c) of the Act affirm that the law prohibits a taxpayer from deducting tax that it paid on behalf of its customers. A taxpayer cannot therefore, be allowed to deduct tax paid from its taxable revenue .

65. It is on this basis that the Tribunal affirmed that the Respondent’s assessment where it included the excise duty of Kshs 59,230,455,00 that had previously been paid by the Appellant as part of its taxable revenue for corporation tax purposes was lawful.

d. Whether the Appellant is entitled to Utilise the 2014 Tax Overpayment to Settle the Corporate Tax Assessment for the 2015 Year of Income 66. The Appellant’s argument on this issue was as follows:a.That in determining the Corporate income tax liability, the Respondent failed to consider tax overpayments carried forward from the 2014 year of income amounting to Kshs. 29,524,952. 00. Had the overpayments been factored into the corporate income tax assessment as the Appellant would end up in a tax overpayment position. This position was pointed out to the Respondent in the objection.b.That in the objection decision, the Respondent denied including the overpayment in the objection on the basis that the Appellant ought to have applied for a refund of the amount in line with Section 47 of the Tax Procedures Act.c.That with respect to the requirement to file a refund claim, the Respondent argues that in the iTax system was configured to make taxpayers unable to apply for refund in the year 2015. d.That the Respondent had previously admitted that the iTax is configured to automatically process refunds once a taxpayer has filed a claim for refund, It cited paragraph 55 of TAT case in National Bank Kenya Limited Vs. Commissioner of Domestic Taxes (Tax Appeal No. 474 of 2020) where the Respondent submitted as follows:“55. On the Appellant’s contention that it had not applied for refund and therefore it was improper for the Respondent to process the same, the Respondent submitted that, prior to 2019, once a taxpayer claimed a refund, albeit being in the wrong field as in the case of the Appellant, the iTax system would automatically create a task to the refunds officer to initiate a tax refund process even if the taxpayer has not applied for the refund thus it was not required that the Appellant maKshs. a formal application for the Respondent to begin processing the refunds.”e.That based on the Respondent’s own submissions in the National Bank case, it argued that it was clear that the Respondent had automated the process and assumed the role of complying with the requirements of Section 47(1) that required the Appellant to apply for a refund. In its view, it was therefore, unreasonable for the Respondent to now turn around and deny the Appellant a refund on account of not having filed a refund because by its own submissions, its own system automatically applied for a refund.f.That the Respondent’s conduct in the matter is a clear breach of the Appellant’s right to fair administrative action guaranteed in Article 47 of the Constitution which guarantees every person the right to administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair. In the circumstances, the Respondent’s decision to fail to consider the Appellant’s 2014 tax overpayment in raising the corporate income tax assessment is a breach of the Appellant’s right to fair administrative action.

67. Though the Respondent did not submit on this matter its Statement of Facts however affirmed that:a.The Appellant had not been audited for its refund claims in relation to tax credits for the 2014 periodb.The Appellant ought to have applied for refunds and once verified they could be transferred to the 2015 return period as per the provisions of Section 47(1) of the TPA.c.The Appellant had made a request for utilization of the alleged 2014 overpayments to settles the corporate tax assessment for the 2015 year of income, but the Appellant did not avail documentation for the Respondent to confirm the accuracy of the amount claimed.

68. The Respondent stated as follows in regard to this issue in page 6 of the objection decision:“During the objection review, we requested you to provide a schedule of the manual certificates claimed under ‘Section 42’ credits in your 2015 and 2016 returns. We further noted you had made claims under Section 41 credits in the returns for the year 2015 in regard to the same.”Its objection decision continued to state as follows:“we hereby advise you to forward your claims and all supporting documents to your Tax Service Office-Large Taxpayers’ Office at Ushuru Pension Plaza-Wetlands. The team will review your claims and have them put correctly in your iTax ledger.”

69. The content of this letter has invited the Tribunal to make a determination on whether the Tribunal has jurisdiction to hear and determine this issue.

70. The jurisdiction of the Tribunal can be invoked under Section 52(1) which reads as follows:“A person who is dissatisfied with the 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)”

71. The Tribunal has looked at the impugned objection decision and our view is that the Commissioner has not decided on whether to allow or disallow the Appellant’s request to utilize the 2014 tax overpayment in the 2015 year of income.

72. In our view, this matter is still alive because the Appellant was requested to supply additional documents and to also visit the Appellant’s offices in Wetlands, Nairobi to obtain help. In fact on whether it would allow or decline the request for refund or utilization of the overpayment in subsequent financial years. This also explains why the Respondent aptly described its objection decisions as ‘partial objection’. This must have been in recognition of the fact that some decisions like this one had not been made and or finalized.

73. Flowing from the above, it is clear to the Tribunal that the Respondent has not decided on this issue of refund or utilization of the overpayments in 2014 to offset the Appellant’s tax liabilities in 2015 and or the subsequent years. This, therefore, means that the Respondent has not made an appealable decision in regard to this issue from where the Tribunal could exercise its jurisdiction.

74. The Tribunal therefore, hold that it lacks the jurisdiction to make a determination on whether the Appellant was entitled to utilize the 2014 tax overpayment to settle the Corporate tax assessment for the 2015 year of income as the issue is prematurely before it.

Final Decision 75. The upshot of the foregoing is that the Appellant ‘s Appeal partially succeeds and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal succeeds to the extent of the tax liabilities that were covered in the Partial Consent dated the 12th of July 2022 and entered as a Judgment of the Tribunal on the 13th July, 2022. b.The Respondent’s partial objection decision dated the 27th of August 2021 is hereby upheld save for the taxes that were covered in the Partial Consent dated the 12th of July 2022 and entered as a Partial Judgment of the Tribunal on the 13th July, 2022. c.Each party to bear its own costs.

76. Orders accordingly.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH 2023. ………………………….ERIC N. WAFULA CHAIRMAN…………………………….. ……………………….RODNEY OLUOCH EDWIN CHELUGET MEMBER MEMBER