[2024] KETAT 1137 (KLR)

Executive Super Rides Limited v Commissioner General, Kenya Revenue Authority & another (Tax Appeal 368 of 2023) [2024] KETAT 1137 (KLR) (1 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1137 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 368 of 2023

RM Mutuma, Chair, EN Njeru, M Makau, AM Diriye & B Gitari, Members

August 1, 2024

Between

Executive Super Rides Limited

Appellant

and

Commissioner General, Kenya Revenue Authority

1st Respondent

Commissioner, Investigation and Enforcement

2nd Respondent

Judgment

Background 1. The Appellant herein is a Private Company incorporated in Kenya on 22nd January 2008 and commenced operations on the same year. The Appellant’s main business activity is sale of Motor Vehicles.

2. The Respondents are principal officers appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the 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 Respondents issued the Appellant with a notice of assessment dated 6th April 2022 for the years of income 2015 to 2019. The Appellant lodged objection applications dated 3rd May 2022 and 23rd November 2022. Upon consideration of the objections, the Respondents issued the Appellant with their Objection Decision dated 17th April 2023.

4. The Appellant being dissatisfied with the Objection Decision, lodged this Appeal vide a Notice of Appeal dated 15th May 2023 and filed on 16th May 2023.

The Appeal 5. The Memorandum of Appeal dated 29th May 2023 and filed on 30th May 2023 raises the following grounds of appeal:a.That the Appellant did not import a total of 286 motor vehicles under the period under review as alleged by the Respondents.b.That not all the motor vehicles were imported by the Appellant as the principle purchasers and that the Appellant merely acted as agents and imported a number of them on behalf of other buyers/importers.c.That for all motor vehicles imported by the Appellant on behalf as well as for onward resale the requisite VAT on commissions earned as well as all other taxes were paid in full.d.That not all motor vehicles imported by the Appellant have been sold and several units remain unsold to-date and therefore not subject to Corporate Tax and VAT.e.That the Appellant did not make a profit margin of Kenya Shillings 100,000. 00 on every motor vehicle imported by the Appellant during the period under review as alleged by the Respondents.f.That the claim of income tax of Kenya Shillings 101,406,741. 00 is on the premise that the Appellant made a taxable profit of Kenya Shillings 1,181,897. 00 (Kenya Shillings 338,022,468. 00 divided by 286 motor vehicles) per motor vehicle alleged imported and sold yet the Appellant did not make that kind of profit from any of the motor vehicles sold.g.That the calculation of VAT does not factor in input tax incurred by the Appellant and this omission overstates the amount of VAT calculated by the Respondents.h.That the Respondents on Appellant's VAT returns or self-declared VAT turnover in calculating VAT due but ignored the Appellant’s self-declared input tax.i.That the Appellant did not earn a standard commission of 2. 5% from the motor vehicles sold on behalf of others.j.That the Respondents calculation of taxable income does not factor in allowable expenses as per the provisions of Section 15 of the Income Tax Act.k.That under the rules of natural justice that promotes equality to all as espoused by the Constitution of Kenya on fairness and equality, the Respondents largely ignored the bigger picture of ‘Missing Traders’ that is the mass importers of motor vehicles that lack physical address and therefore easily escape the Respondents’ attention thereby offering unfair competition to the Appellant without being subjected to the same taxation regime applied by the Respondents on the Appellant.

The Appellant’s Case 6. The Appellant’s case is premised on its;a.Statement of Facts dated and filed on 30th May 2023 together with the documents attached thereto;b.Written submissions dated and filed on 29th January 2024; and,c.Witness Statement of Eric Kimathi dated & signed and filed on 29th January 2024, admitted as evidence in chief on 26th March 2024.

7. The Appellant’s case is that it is a registered enterprise in Kenya carrying out the business of motor vehicles import both for itself and for onward resale.

8. According to the Appellant, on the 17th April 2023, the Respondent issued a tax objection claim totalling to Kshs. 116,733,564. 04 arising from the period of review years 2015 to 2019 and comprising of Corporation Tax and VAT.

9. The Appellant stated that it has endeavoured to comply with the guiding laws in all of its undertakings, including declaring and paying all taxes as they fall due. To substantiate this point, the Appellant relied on copies of transaction documents for all the Motor Vehicles imported and sold within the period under review, including all the attendant costs and profit/loss margins.

10. The Appellant asserted that over the course of the period in review, it made numerous attempts to have the dispute resolved via requesting for comprehensive audits by the Respondents. This was to align and reconcile the reports or records held by the two parties so as to have a full closure. According to the Appellant, this was largely ignored or overridden by the Respondents. To substantiate this issue, the Appellant relied on several correspondences addressed to the Respondents on various dates over the period under review.

11. The Appellant accused the Respondents of failing to address all tax queries arising and brought to Respondents’ attention. By failing to provide responses to the queries, the Appellant argued that the Respondents breached Appellant’s confidence and translated to lack of goodwill on part of the Respondents.

12. The Appellant averred that the Respondents at some stage in the period under review confiscated the Appellant’s records and carted them away and never returned the same or issue a verdict on their findings. It alleged that the Respondents ignored requests to return the records or to make a decision thereon. The Appellant stated it has continued to suffer injustice in a skewed process hell-bent on punishing it.

13. According to the Appellant, on 29th April 2022 it offered unsolicited advice especially on “Missing Traders” to ensure that the Respondents taxes all the desired taxes at source of entry and not after trading. This was a genuine attempt to bring equality on taxation and cost of doing business to all the importers and thereby weed out the missing traders who operate from their homes or on fake addresses that are impossible to trace by the Respondents but the Respondents ignored this advice.

14. Finally, the Appellant maintained that it filed all its tax declarations and returns on time in the period under review which is undeniable and that the Appellant has no taxes due during the period in consideration.

15. The Appellant’s witness in his testimony provided the Tribunal with a schedule of the motor vehicles that were imported on behalf of its customers and the commissions made thereof and, those it imported for itself and the profit made thereon for the period 2015 to 2019. Further, the schedule provided indicated the motor vehicles that remained unsold.

16. In further support of the Appeal, the Appellant relied upon its written submissions wherein it submitted that during the financial year 2015 to 2019, it imported 280 and not 286 as alleged by the Respondents. Out of the vehicles imported, 93 were direct imports owned by the Appellant while the remaining vehicles were on agency basis; implying that the Appellant imported the same on behalf of clients who paid an agreed commission for the service rendered. It submitted that it was able to give an account of 280 cars out of 286 and that it was able to give 98% account of all vehicles.

17. The Appellant also submitted that the Respondents’ claim is derived from imagined profits and that they have either totally failed to substantiate or are reluctant to vacate their assumed analogy by adopting the actual and correct documentation as availed by the Appellant.

18. Apart from the foregoing, the Appellant submitted that its claim for input VAT was based on documentations but the Respondents disallowed input VAT contrary to Section 17 of the VAT Act 2013. The Appellant also submitted that the Respondent ignored the provisions of Section 15 (1) of the Income Tax Act.

19. The Appellant relied on the case of Keroche Industries Limited vs. Kenya Revenue Authority and 5 Others Nairobi HCMA No 743 of 2006 [2007] KLR 240 to submit that having complied with the Law; it had a legitimate expectation that the Respondents would allow its VAT claims.

20. Finally, the Appellant submitted that the Respondents ignored or misapplied the provisions of Section 3 (2), Section 15 (1) and Section 54 A (1) of the Income Tax Act. The Appellant also cited the case of Cape Brandy Syndicate vs. Inland Revenue Commissioners (1920) 1KB as applied in TM Bell vs. Commissioner of Income: Tax (1960) EALR 224 to submit that in a taxing Act, one has to look at what is clearly said and that there is no room for intendment in tax, nothing is to be: read in, and nothing is to.be implied.

Appellant’s Prayers 21. The Appellant urged this Honourable Tribunal to make orders that:a.That the Respondents erred in their assessment and thereby arrived at a judgment that is wrong and damaging to the Appellant if allowed to stay;b.That the Appeal herein be allowed and the orders issued on 17th April 2023 by the Commissioner Investigation & Enforcement Department be set aside;c.That the costs of this Appeal and the proceedings be borne by the Respondent.

The Respondent’s Case 22. The Respondents’ case is premised on its;a.Statement of Facts dated and filed on 29th June 2023 together with the documents attached thereon; and,b.Written submission 26th April 2024 and filed on 29th April 2024.

23. The Respondents contended that it commenced investigations against the Appellant and informed it through a notice dated 8th January 2021 after receiving information of under declaration of Income by the Appellant resulting from sale of motor vehicles by a very huge variance.

24. The investigations ran from January 2015 to December 2019 and covered Corporation Tax and Value Added Tax. The investigations indicated that the Appellant declared its sales as commission paid out to agents for sales with variance between credits and VAT sales declared.

25. The Respondents’ investigation team extracted information on the compliance history of the Appellant from the Respondents’ databases, which include iTax and TIBC Jasper soft; Bank statements from Equity Bank and Bank Statement analysis; and comparative analysis with the declarations in the returns.

26. To establish compliance, the Respondents alleged that the investigating team analysed the self-declared returns for the period 2015 to 2020; compared the Company’s self-declared sales in returns against the customers’ deposits in the bank statements for the period under review; and compared the investigation findings with the declarations in the returns.

27. According to the Respondent, an analysis was also done on the Appellant’s net bank credits in the three bank accounts domiciled in Equity and Guardian Bank accounts. It also alleged that it did an analysis on the import data for the director and the Appellant and established that 286 motor vehicles were imported for the period 2015 to 2019. The cost was considered as the Appellant’s purchases.

28. The Respondents stated that the profit margin of Kshs. 100,000. 00 was applied for each imported motor vehicle to establish the taxable income. Further, they added that the credits in the analysed bank statements from bank accounts were subjected to a 2. 5% commission rate after taking into account the sale of the imported motor vehicles. The Commission established was charged Corporation Tax at 30%.

29. The Respondents asserted that the self-declared Income Tax returns were compared with the adjusted sales from the motor vehicle imports and noted that the Appellant under declared the sales hence reducing the taxable income for the period under investigation. The difference was then subjected to corporation tax.

30. The Respondents also asserted that the self-declared VAT tax returns were compared with the adjusted sales of the imported motor vehicles and found that the Appellant had been under declaring the sales. The difference was then charged then charged VAT.

31. Upon conclusion of the investigations, the taxes amounting to Kshs. 192,832,719. 00 comprising of both Corporation Tax and VAT was established. The Appellant objected to these findings. The Respondents stated that the Appellant provided supporting documents on 24th March 2023 vide its letter dated 21st March 2023 which therefore means that the sixty (60) days started running on 24th March 2023.

32. The Respondents averred that they were guided by Section 51 of the Tax Procedures Act and issued the Appellant with an Objection Decision dated 17th April 2023 claiming additional taxes of Kshs. 116,733,564. 04 consisting of Corporation Tax of Kshs. 101,406,741 and Value Added Tax of Kshs. 15,326,823. 04.

VAT Computation 33. On the issue of how to determine sales, the Respondents alleged that the Appellant did not provide sufficient documents to support the computation of taxes payable since the Appellant provided sample sale agreements from which it was not possible to determine the actual margin that the Appellant received. The Respondents therefore, resorted to determination of the taxable income from the import data since it could be verified from the information available to the Respondents.

34. On the issue of deductibility of input VAT, the Respondents argued that they were guided by Section 17 (1) (2) and (3) of the VAT Act which provides for the requirements for deductibility of input VAT including: registration for VAT; making taxable supplies and charging VAT thereof; input VAT claimed within the stipulated timelines; and possession of the documents set out in Section 17 (3) of the VAT Act.

35. The Respondents also relied upon Section 17 (3) of the VAT Act that provides for documentation that must be held by a person to qualify for the deduction of input VAT which includes the customs entry duly certified by the proper officer and a receipt for the payment of tax. The Respondents stated that the information on the import VAT claimed was used to determine the VAT payable.

Corporation Tax Computation 36. The Respondents maintained that they did not change the commission rate of 2. 5% because the Appellant only provided a schedule of the vehicles sold as well as an analysis of the cost of sales which was only supported with some sale agreements, which was not sufficient to determine the actual profit margins.

37. Whereas it was the Appellant’s position that Section 15 of the Income Tax Act provides for allowable expenses, the Respondents argued that it is a general accounting principle that expenditures must be supported with evidence to ensure they are verifiable. The Respondents also cited Section 54 A (1) of the Income Tax Act which provides that the Appellant should keep sufficient records and documents that are adequate for purposes of computing tax.

38. The Respondents asserted that in the absence of documentary evidence to support the expenses, the Respondents only factored in the importation costs that could be traced in the documents available in the internal databases. The Respondents also asserted that they adopted the determination of income tax payable from the analysis of import data as per the notice of assessment without any adjustment.

39. The Respondents maintained that the Appellant is being economical with the truth under the Memorandum of Appeal on the following grounds:a.Whereas the Appellant in its first ground only states that it “did not import a total of 286 motor vehicles” the Appellant does not clarify how many motor vehicles were imported.b.Whereas in second ground of Memorandum of Appeal, the Appellant states that “not all the motor vehicles were imported by the Appellant as the principal purchasers,” and that it merely acted as agent and imported a “number of the motor vehicles” on behalf of other buyers/importers, the Appellant does not state the exact number or details of the motor vehicles they imported on behalf of other parties.c.Whereas the Appellant in its fourth ground only states that “not all motor vehicles imported have been sold,” the Appellant does not provide information on the specific number of motor vehicles sold as at a specific point in time.d.The Appellant in grounds 5, 6 and 9 only disputes the Respondents’ position on profit margin, taxable profit and commission earned by the Appellant without providing tangible evidence in terms of documents and information on what is the correct profit margin, taxable profit and commission earned.e.In further response to grounds 5, 6 and 7, the Respondents maintained that the Appellant only provided a schedule of the vehicles sold as well as the cost of sales which was only supported with some sale agreements. Therefore, the documents provided were not sufficient to determine the actual profit margins.

40. In response to the Appellant’s 7th and 8th grounds of the Memorandum of Appeal, the Respondent stated that it relied on the import data due to failure on the part of the Appellant to provide sufficient evidence to support its objection.

41. In response to grounds 8 and 9, the Respondents stated that the only contention is whether the Appellant has the required documents in support of this claim. The Respondents cited Section 17 (3) of the VAT Act which provides for documentation that must be held by a person to qualify for the deduction of input VAT which include the customs entry duly certified by the proper officer and a receipt for the payment of tax.

42. In response to ground 10 of the Memorandum of Appeal, the Respondent relied on Section 54 A (1) of the Income Tax Act which provides that the Appellant shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds and contacts and vouchers which in the opinion of the Respondents are adequate for the purpose of computing tax.

43. In response to ground 11 of the Memorandum of Appeal, the Respondents stated that it carefully considered the Appellant’s grounds of objection and documentation and issued a decision to the extent supported.

44. The Respondents’ case is that the Kenyan tax system is a self-assessment system where a taxpayer assesses itself and makes payments to KRA and that all one requires is to acquire a KRA PIN and access the iTax system for one to file their returns for purposes of Income Tax and VAT. The Respondents averred that upon conclusion of the review it discovered that there was underpayment of taxes.

45. The Respondent cited Section 59 of the Tax Procedures Act which provides that the onus is on the Appellant to produce records for the purposes of obtaining full information in respect of the Appellant’s tax liability but the Appellant failed to discharge this mandate.

46. Finally, the Respondent cited Section 30 of the Tax Appeals Tribunal Act and Section 56 of the Tax Procedures Act which imposes the burden of proof on the taxpayer to prove that an assessment is excessive or a tax decision is incorrect. The Respondents argued that the Appellant failed to discharge this mandate.

47. The Respondents relied in its written submissions the Respondents identified one main issue for determination:Whether the Respondents was right in rejecting the Appellant’s Objection and confirming the assessments issued earlier.

48. The Respondents submitted that in ground 1 of Memorandum of Appeal the Appellant stated that it did not import 286 motor vehicles during the period under review. However, in Paragraph 5 of the Appellant’s witness statement, the Appellant stated that it imported a total of 280 motor vehicles meaning that there is an overstatement of 6 units.

49. Whereas the Respondents claims that the Appellant imported 286 vehicles, the Respondents submitted that the Appellant’s schedule attached to its witness statement indicates that the Appellant imported 228 vehicles bringing a variance of 58 motor vehicles.

50. The Respondents also submitted that there was a variance of 52 motor vehicles between the number of motor vehicles that the Appellant claims to have imported (280 vehicles) and the number of motor vehicles in the Appellant’s schedule attached to its witness statement (228 vehicles).

51. The Respondents pointed out that at paragraph 6 of the Appellant’s witness statement, the witness stated that the Appellant imported 93 units as direct imports owned by the Appellant yet at paragraph 8 of the same witness statement, the Appellant contends that out of the 93 units it has only sold 89 units. The Respondents submitted that Appellant’s motor vehicles do not include the 4 unsold motor vehicles. The Respondents further submitted that the Appellant did not indicate the sold and the unsold motor vehicles considering that the notice of assessment was issued on 6th April 2022.

52. The Respondents submitted that they exercised their best judgment appropriately in the circumstances thereby arriving at the tax assessment they did. It cited the case Nairobi TAT No. 25 of 2016 Family Signature limited vs. The Commissioner of Investigations & Enforcement wherein this Tribunal held that when the Respondent is prompted to resort to an alternative method of determining the income and in assessing the tax liability of a taxpayer, it has the onerous responsibility to act reasonably by exercising best judgement informed by pragmatic and reasonable considerations that do not in any manner result in a ridiculously high-income margin.

53. Finally, the Respondents submitted that the Appellant failed to discharge its burden of proof under Section 56 of the Tax Procedure Act. The Respondents cited the case of Joycott General Contractors Limited vs. Kenya Revenue Authority TAT NO. 28 of 2018 wherein the Tribunal stated that the Appellant has a burden to prove that the Respondent’s decision is wrong.

Respondent’s prayers 54. The Respondent prayed that;a.The Appellant’s Appeal lacks merit and should be dismissed;b.The Objection decision dated 17th April 2023 be upheld; and,c.The Respondents be awarded costs of the Appeal.

Issues for Determination 55. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, puts forth the following issues for determination:i.Whether the Respondents’ Objection Decision is statute time barred;ii.Whether the Respondents’ assessments are time barred; andiii.Whether the Respondents’ were justified in rejecting the Appellant’s Notice of Objection.

Analysis and Findings 56. The Tribunal wishes to analyse the issues as hereunder.

i. Whether the Respondent’s Objection Decision is statute time barred; 57. The Appellant did not raise this issue. However, the Tribunal examines the issue suo moto to ensure that there is strict adherence of the law.

58. The Respondents in their Objection Decision states that the Appellant objected to the assessments on 23rd November 2022, the Tribunal examined the Appellant’s pleadings and found letter dated 3rd May 2022 titled ‘Objection to tax assessment.’ The Respondents received this letter on 4th May 2022. The Tribunal also examined the Appellant’s letter dated 23rd November 2022 titled ‘Objection to the Tax Assessment.’ Consequently, it appears that the Appellant lodged two objections to the same assessment. The Tribunal examines the two notices of objection in light of Section 51 (11) of the Tax Procedures Act.

(ii) The Appellant’s Notice of Objection dated 3rd May 2022. 59. If this Tribunal is to treat the letter dated 3rd May 2022 as the Appellant’s Notice of Objection, then, a finding that the Appellant lodged its objection within 30 days as provided for under Section 51 (2) of the Tax Procedures Act would not be difficult.

60. The Tribunal keenly examined the pleadings filed by both parties in light of Section 51 (11) the Tax Procedures Act. The Tribunal established that the Respondent filed its 11-pager statement of facts wherein it filed three (3) annexes. Annex 1 was marked as KRA-1 being a notice dated 8th January 2021 informing the Appellant of tax investigations. Annex 2 was marked as KRA-2 being a notice of assessment dated 6th April 2022 for the years of income 2015 to 2019. Finally, annex 3 was marked as KRA-3 being the Objection Decision dated 17th April 2023. That was the documentary evidence that the Respondents relied upon.

61. However, the Respondent in its Objection Decision stated that the Appellant objected to the assessments on 23rd November 2022. The Tribunal examined the letter dated 23rd November 2022 and confirmed that it is also an objection to the Respondents’ assessments.

62. Since the Respondent opted to work with the letter dated 23rd November 2022 as the operational Notice of Objection, it then follows that the Respondent ought to have issued its decision on or before 22nd January 2022.

63. The High Court of Kenya has pronounced itself on this issue where in the case of Income Tax Appeal, no. E69 of 2020 (Equity Group Holdings Ltd vs. Commissioner of Domestic Taxes) as consolidated with Income Tax Appeal, no. E25 of 2020 (Commissioner of Domestic Taxes vs. Equity Group Holdings Ltd), the learned Judge opined that an Objection Decision issued three days past the 60-day period granted, could not stand as it violated an express substantive statutory provision. The court posited as follows:“substantive law defines the rights and duties of the people, but procedural law lays down the rules with the help of which they are enforced… A statutory edict is not procedural technicality. It’s a law which must be complied with…”

64. Based on the foregoing analysis, the Tribunal finds and holds that the Respondent’s Objection Decision dated 17th April 2023 is statute time barred contrary to Section 51 (11) of the Tax Procedures Act. Therefore, the Appellant’s Notices of Objection stood as allowed by operation of law.

65. The Tribunal having made this finding, shall not delve into the outstanding issues for determination as the same have been rendered moot.

Determination 66. The upshot to the foregoing is that Appeal succeeds not on grounds that the Appellant raised but on grounds herein specified, consequently the Tribunal makes the following orders; -a.The Appeal be and is hereby allowed;b.The Respondent’s assessments and the resultant Objection Decision dated 17th April 2023 be and is hereby set aside.c.Each party to bear its own cost.

67. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 1ST DAY OF AUGUST 2024ROBERT M. MUTUMA................................CHAIRPERSONELISHAH N. NJERU ................................ MEMBERMUTISO MAKAU.......................................MEMBERABDULLAHI DIRIYE...................................MEMBERBERNADETTE GITARI..............................MEMBER