[2023] KETAT 602 (KLR)

Foton East Africa Limited v Commissioner of Investigations & Enforcement (Tax Appeal 365 of 2021) [2023] KETAT 602 (KLR) (Civ) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 602 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 365 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

June 29, 2023

Between

Foton East Africa Limited

Appellant

and

Commissioner of Investigations & EnforcementEnforcement

Respondent

Judgment

Background 1. The appellant is a Kenyan vehicle assembly company whose shareholding is 100% foreign held. The appellant operates in Nairobi area near ICD - Embakasi.

2. The respondent is appointed under and in accordance with section 13 of the Kenya Revenue Authority Act, and 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 respondent first wrote to the appellant on June 28, 2016 communicating the preliminary findings of tax investigations on Foton East Africa Limited pursuant to sections 59(1)(c) and 61 of the Tax Procedure Act.

4. This was followed by a meeting held in the respondent’s office on January 5, 2018.

5. The appellant received a demand letter for Kshs 103,827,302. 72 on January 20, 2018 as an additional assessment for the periods 2015 and 2016.

6. On December 20, 2018 the respondent sent an agency notice to one of the appellant’s clients, the County Government of Nairobi to freeze any payment to the appellant.

7. The appellant received further correspondence from the respondent on January 10, 2019 when the DTD Enforcement Department placed further agency notices.

8. On March 7, 2019, the appellant received another demand letter from DTD Enforcement Department accompanied with a notice of distress from Keysian Auctioneers.

9. Aggrieved by the respondent’s actions, the appellant thereafter filed the Appeal on July 2, 2022.

The Appeal 10. The Appeal is premised on the following grounds as stated in the appellant’s Memorandum of Appeal dated July 1, 2021 and filed on July 2, 2021:-a.That the respondent erred in law and fact by charging withholding tax on deemed interest on moneys advanced from the parent company in China at an interest rate of 0. 001%. This information was provided for but ignored by the respondent.b.That the respondent erred in law and fact in raising the additional VAT by failing to take cognizance of the fact that the appellant's accounts had errors which needed proper reconciliations to arrive at the correct and enforceable tax figures in the year 2013 and 2014. c.That the respondent erred in law and fact by failing to consider the hire purchase agreement under which most of its products were sold. This has a larger impact on the amount of sales declared hence the amount of tax liability demanded.d.That the respondent confirmed the notice of assessment without due regard to all records, explanations and information provided by the appellant thereby failing to appreciate all issues presented by the Appellant before confirming the assessment.e.That the respondent erred in law and fact for failing to recognize the amounts of duty paid during the period under audit by the appellant in costing the motor vehicle for the purposes of arriving at the ex- factory value.f.That the respondent erred in law by failing to abide by the provisions of section 17 of theVAT Act No 35 of 2013. The Respondent did not provide for the VAT overpayments during the period even though all the information and documentation were provided for the same.g.That the respondent erred in fact when calculating the outstanding VAT by failing to allow the VAT payments made by the Appellant during the period under audit.h.That the respondent erred in law by charging income tax of 30% on an overstated gross profit. The respondent did not take into consideration the operation expenses incurred even after the appellant provided all documentation and facts supporting the expenditure.i.That the respondent erred in law and fact by carrying out an assessment for the years of income 2015 and 2016 without informing the Appellant and confirming the same without the Appellant’s input as provided for under section 29 (2) of the Tax Procedure Act, 29 of 2015 and section 73 of the Income Tax Act 2 of 1975. j.That the respondent erred in law and fact by disallowing VAT input tax on imports entries on the mere fact that the entries could not be traced. This is not enough reason since all the entries provided can be accessed by the respondent on the Simba System. These entries were provided by the appellant.k.That the amounts confirmed by the respondent of Kshs 434,468,418. 00 in respect to withholding tax, VAT and income tax for the period January 2011 to February 2016 is therefore wrong in law and fact and should be annulled.

Appellant’s Case 11. The appellant’s case is premised on the following documents:a.The appellant’s Statement of Facts dated 30th June 2021 and filed on 2nd July 2021 together with the documents attached thereto and proceedings before the Tribunal.b.The Appellant’s written submissions dated and filed on 15th February 2023 together with the authorities attached thereto.

12. That the respondent first wrote to the appellant on June 28, 2016 communicating the preliminary findings of tax investigations on Foton East Africa Limited, pursuant to sections 59(1)(c) and 61 of the Tax Procedure Act. That this was followed by a meeting held in the respondent’s office on January 5, 2018

13. The appellant submits that all the information pertaining to input taxes and all the deductible expenses were within the purview of the respondent but it chose to ignore expenses incurred to generate the business income in its computation contrary to section 51(1) of the Income Tax Act therefore rendering the respondent's computation fatally defective and materially misstated.

14. That in the referred meeting, the appellant requested verbally the respondent to allow it with the books and the workings so that it could reconcile and revert to the respondent, a feat it undertook but did not honor. That since the date of investigations, the appellant’s records were carried by the respondent and were not returned to date.

15. That the appellant received a demand letter for Kshs 103,827,302. 72 on January 20, 2018 as an additional assessment for the periods 2015 and 2016. That this assessment was not communicated to the appellant by the respondent when it was done and by whom. That the respondent did not involve the appellant on the process as laid down in the Act. That the appellant therefore, was not accorded due chance to defend its position before, during and after the audit as stipulated in the law.

16. That on December 20, 2018 the respondent sent an agency notice to one of the appellant’s clients, the County Government of Nairobi, to freeze any payment to the appellant. That this has negatively impacted the appellant’s business and to date has hindered the County Government of Nairobi from settling its account.

17. That the appellant never received any communication from the respondent until January 10, 2019 when the DTD Enforcement Department placed further agency notices to its banks freezing all its bank accounts but on lesser amounts than what was purportedly assessed and confirmed.

18. That the appellant while still requesting the respondent to release its documents to enable it reconcile, on March 7, 2019 received another demand letter from DTD Enforcement Department accompanied with a notice of distress from Keysian Auctioneers.

19. That the appellant has since been paralyzed and unable to conduct any business in the country and the neighboring East Africa which it had already started to penetrate.

20. The appellant avers that the assessment was not handled carefully and diligently by the respondent because:a.Assumption that difference between the VAT 3 submissions and financials constitute sales and profit without due process to the matching concept is wrong.b.For the failure by the respondent to recognize the appellant’s plea that there were errors in its books and the respondent’s failure to grant the appellant the opportunity to correct the errors as when they were realized.c.Failure by the respondent to return the appellant’s books of accounts to date to enable it reconcile and either agree or disagree with the respondent’s workings.d.By the respondent applying 30% corporation tax on the gross difference between the VAT 3 declared sales and the financial profit instead of net profit and disallowing all of the appellant’s expenses even after the provision of the relevant documentation.e.Failure by the respondent to recognize the engagement contract for the loan advanced in 2013 from the appellant’s mother company and going forward to charge withholding taxes on deemed interest.f.Failure by the respondent to provide its workings in a bid to explain in black and white the genesis of the taxes so demanded.g.Failure of the respondent to involve the appellant in the additional assessment of 2015 and 2016 year of income.

21. That while the appellant endeavors to settle the issue on the taxes to a speedy conclusion, the respondent is still stuck by its demands, agency notices and non­ release of documentation to the appellant to file its rebuttal.

22. That the respondent erred in law and in fact in concluding that money invested by foreign investors in the Country be treated as loans and be subjected to the operations of deemed interest thereby attracting withholding taxes.

23. That section 16(3) of the Income Tax Act, Cap 470 of the Laws of Kenya provides as follows:“For the purposes of subsection (2), the expressions -“All loans” means loans, overdrafts, ordinary trade debts, overdrawn current accounts or any other form of indebtedness for which the company is paying a financial charge, interest, discount or premium;”

24. That “Financial Charge is” defined as:“A finance charge is the cost of borrowing money, including interest and other fees. It can be a percentage of the amount borrowed or a flat fee charged by the company. Credit card companies have a variety of ways of computing finance charges.”

25. That from the above, nothing touches on the invested money by foreigners into the Country. That it is worthy to note that taxation is an institution whose boundaries are clearly delineated by law and specialized principles.

26. That by Parliament amending the section 16(2) of the income Tax Act, cap 470 via Finance Act No 10 of 2010, Parliament attempted to cure albeit the ambiguity which could have risen by the introduction of deemed interest on loans. That the definitions provided for in this section of the law are in themselves clear and devoid of any ambiguity created by the action of the respondent during this assessment and its review. That it is worthy to note that taxation is on institution whose boundaries and operations are clearly delineated by law and specialized principles and where ambiguity arose, the benefits accrues to the taxpayer.

27. That in the event that the law provides a clear definition of a term as in the case of deemed interest and what constitute loans liable to deemed interest, the Respondent has no power to infer a meaning on the same to cause an ambiguity that injures the taxpayer.

28. On the issue of income tax and VAT, the appellant avers that the International Accounting Standards (IAS 18. 14) opine “Revenue is recognized when it is probable that the future economic benefits will flow to the entity and those benefits can be measured reliably”. That it therefore gives five conditions as guidelines for recognition of income which then governs preparation of accounts reports. These conditions are:a.The seller has transferred to the buyer the significant risks and rewards of ownership,b.The seller retains neither managerial involvement nor control over the goods sold.c.The amount of revenue can be measured with reasonable accuracy.d.It is probable that the economic benefits associated with the transaction will flow to the seller.e.The cost incurred in respect of the transaction can be measured reliably.

29. That these fundamental guidelines have not been met in the appellant hire purchases agreement and as such, the respondent ought to have accepted the amendments as provided for by the appellant in its objection.

30. That section 3(2)(a)(i) defines income upon which tax known as income tax is chargeable under this act as “gains or profits from ....... Any business, for whatever period of time carried on...”

31. That section 5(1) of the VAT Act No 35 of 2013 states that “A tax, to be known as value added tax, shall be charged in accordance with the provision of this Act on:a.A taxable supply made by a registered person in Kenya;b.The importation of taxable goods; andc.Supply of imported taxable services.”

32. That section 3 (1) of the Sales of Goods Act cap 31, defines a sale of goods as “a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called the price”.

33. That the hire purchase agreement does not absolutely transfer the rights envisaged and the sales act to the hirer hence comes short of what is provided for under the provisions of IAS18 (now replaced by IFRS16).

34. That in Longonot Gate Development Limited vs Commissioner of Domestic Taxes, TAT No 58 of 2015, it was held that “Gains on deposits received as part payment towards purchase do not count as revenue for the year of income and therefore are not taxable under income tax law for that year of income”.

35. The appellant relied on the decision delivered in Arthur Murray (NSW) Pty Limited vs Commissioner of Taxation (1965), in England where it was held that: “in our opinion, on the facts appearing in the case stated the conclusion is that it is not open that receipts of fees for specified number of dancing lessons to be given in the future period is a derivation of assessable income”.

36. The appellant avers therefore that the respondent erred in law and fact and such the purported variances in sales were occasioned by these timing difference which the respondent ought to have taken into consideration. That therefore the appellant prays that the assessments be annulled and the appeal be allowed.

37. On the issue of importation of CKDs and CBUs into Kenya, for CBUs, customs duties (thus customs duty - 25% and excise duty - 20%) are paid monies which ought to form part of the cost of production. That in the review, the respondent disallowed all the import duties paid hence disenfranchising the appellant of his rights provided for under the taxation laws of Kenya.

38. That the importer makes a purchase order and obtains from the supplier, the commercial invoice, bill of lading or airway bill and in some cases, insurance documentation. That with those documents, the importer is then able to raise the Import Declaration Form (IDF) and upon arrival of the consignment at the port of entry, the importer or his agent completes an entry form. That armed with the said documents, the importer prepares a Single Administrative Form (Form C17B); which indicates as a summary the nature of the imports hence the tax classification, the nature of the importation hence the customs processing code (CPC), the value of the imports and any exemption code applicable.

39. That thereafter, KRA computes the taxes payable on the entry using the automated Simba System and its officers then verify the consignment at the point of entry to ascertain the value of the goods, tariff classification and quantity among other requirements. That during this verification KRA checks the accuracy of the value of the goods and the sufficiency of the description thereof to enable it verify the correct tariff code having regard to the particulars of the goods as shown in the commercial invoice. That all taxes including import duty, Value Added Tax (VAT) and the assessed IDF fees are then paid (where applicable) at this point after which a customs clearance certificate is issued and the goods released.

40. It was the appellant’s case that the Simba System did, at all material times, compute all taxes payable which the Appellant duly paid.

41. That the OECD valuation handbook provides the following:“The primary basis for customs value under this Agreement is "transaction value" as defined in article 1. Article 1 is to be read together with article 8 which provides, inter alia, for adjustments to the price actually paid or payable in cases where certain specific elements which are considered to form a part of the value for customs purposes are incurred by the buyer but are not included in the price actually paid or payable for the imported goods. Article 8 also provides for the inclusion in the transaction value of certain considerations which may pass from the buyer to the seller in the form of specified goods or services rather than in the form of money. Articles 2 through 7 provide methods of determining the Customs value whenever it cannot be determined under the provisions of Article 1. ”

42. That the EACCMA 9(1) of the 4th Schedule provides inter alia:“ln determining the customs value under the provisions of paragraph 2 there shall be added to the price actually paid or payable for the imported goods as follows:(a)•••(b)...(c)Royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly as a condition of sale or the goods being valued to the extent that such royalties and fees are not Included in the price actually paid or payable.(d)The value of any part of the proceeds of any subsequent resale, disposal or use of the Imported goods that accrues directly or indirectly to the seller”

43. That the respondent, in treating all the imports as CKDs and disallowing the import duties paid on these units, defies logic. That it is again worse by disallowing the VAT paid on imports on argument that the appellant did not provide the original entries for the same even when the entry numbers were provided for its verification and determination.

44. The appellant submits that the respondent has powers to assess and demand payment of taxes due; it was submitted that statutory powers can only be exercised validly if they are exercised reasonably, rationally and properly and that no statute ever allows any public officer to exercise statutory power arbitrarily or capriciously, this submission being based on Republic vs Commissioner of Co-operatives ex­ parte Kirinyaga Tea Growers Co-operative Savings and Credit Society Ltd. [1999] 1EA 245 (CAK) at page 249.

45. The appellant relied on Republic vs Kenya Revenue Authority ex parte Aberdare Freight Services Limited {2004] eKLR at page 20 where Nyamu J (as he was then) stated that:“It is now an accepted principle in this field of law that statutory powers and duty must be exercised and performed reasonably” as well as the same learned Judge's decision in Keroche Industries Limited vs Kenya Revenue Authority [2007] eKLR at page 16.

46. The appellant confirms that it has at all times adhered to the relevant tax legislation.

47. The appellant relied on the following authorities:a.Primarosa Flowers Limited vs Commissioner of Domestic Taxes [2019] eKLRb.Commissioner of Income Tax vs Vestmont Power (K) Ltd [2006] eKLRc.Keroche Industries Limited vs KRA & 5others [2007] eKLRd.Mangin vs Inland Revenue Commissioner [1971] AC 739: Lord Donovan Commissioner of Income Tax vs Vestmont Power (K) Ltd 2006 eKLRe.Longonot Gate Development Limited vs Commissioner of Domestic Taxes TAT No 58 of 2015. f.Arthur Murray (NSW) Pty Limited vs Commissioner of Taxation(1965), in England.g.Associated Provincial Picture Houses Ltd. vs Wednesbury Corporation [1948] 1 KB 223, pg 229h.Republic vs Commissioner of Co-operatives ex-parte Kirinyaga Tea Growers Co­ operative Savings and Credit Society Ltd [1999] 1EA 245 (CAK) at page 249i.Republic vs Kenya Revenue Authority ex parte Aberdare Freight Services Limited [2004] eKLR at page 20

Appellant’s Prayers 48. The appellant made the following prayers:a.That the Tribunal sets aside the additional assessment amount on the basis of incorrect interpretation of law and fact by the Respondent.b.That the respondent's confirmed assessments be set aside and further requests the Tribunal to consider the substance of the case

Respondent’s Case 49. The respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:-i.The respondent’s Statement of Facts dated and filed on July 9, 2021 together with the documents attached thereto.ii.The respondent’s written submissions dated February 14, 2023 and filed on February 16, 2023 together with the legal authorities filed therewith.

50. In the respondent's considered view, the following issues are for determination in this matter: -a.Whether the appellant's notice of objection is valid.b.Whether the respondent's charge to tax of the appellant on VAT and WHT and corporation tax are erroneous or excessive.

51. That investigations on the appellant began in 2015 when a taskforce was formed to carry out an audit of selected bonded warehouses, with the objective of assessing compliance with Customs laws and Regulations and adherence to licensing requirements.

52. That from the investigations and findings of the taskforce, it was recommended that a full investigation be launched against the appellant for any unpaid taxes for the financial years 2011-2014.

53. That following the issuance of the findings, the appellant through its director, was invited for a meeting with the respondent to discuss its tax matters. That the appellant through its director responded seeking an additional 10 days as at the time he was out of the Country.

54. That the appellant's director never honoured his request and never appeared for a meeting with the respondent at the end of the time duration extended in its favour. He further could not be reached for more than one year. That the appellant during that period, did not, through itself or its agents, file an objection to the initial findings/ demand.

55. That consequently, the respondent in a bid to secure its interest and recover the taxes, exercised the powers conferred under section 45 of the Tax Procedures Act and issued a departure prohibition order against the appellant's director as the Managing Director and controlling shareholder of the appellant on December 14, 2017.

56. That after the issuance of the departure prohibition order, the appellant through its tax agent contacted the respondent in a move to settle the tax matter.

57. That at the time, the DPO could not be served on the appellant's director personally as he could not be traced. That he had been missing for more than one year and known business premises had been closed due to an ongoing court case between the appellant and NIC Bank.

58. That when the tax agent went to the respondent’s offices on the morning of January 5, 2018, he had not been properly briefed about the facts of the case and was only instructed to request for the Departure Prohibition Order to be lifted. That the tax agent was therefore instructed to produce the director who would also be in a position to guarantee a security if any. That the tax agent left and came back in the afternoon with the appellant’s director.

59. That this is the reason why a meeting was held on January 5, 2018 to discuss the way forward. That at the meeting, the appellant’s director was informed that he could not be allowed to travel since his company was issued with a tax demand amounting to Kshs 223 million which he had not objected to and as such, was due unless he provided security for the taxes.

60. That the appellant's director then stated that he was owed money by the Nairobi County Government amounting to Kshs 140 million for supply of motor vehicles and requested the same to be used as security.

61. That since the appellant’s director did not provide any proof of the money owed by the Nairobi City County, he was advised to prompt the Nairobi County Government to write to the respondent confirming that the amount stated was pending and payable.

62. That it was emphasized that only once the said confirmation was received from the Nairobi County Government would the Departure Prohibition Order be relaxed to allow the appellant's director to travel.

63. That based on this understanding and/or resolution, the respondent issued an agency notice for Kshs 223,402,265. 00 to the Nairobi County Government to act as security for the taxes due from the Appellant pending the letter of confirmation by the Nairobi County Government.

64. That on January 31, 2018 the appellant objected to the respondent's assessment dated June 28, 2016. That the same was a late objection seeing that it was coming more than 2 years after the demand was made. That in the said objection, the appellant admitted to owing the respondent taxes amounting to Kshs 4,350,842. 00 and requested that the undisputed taxes be recovered from Nairobi City County.

65. That the respondent on February 21, 2018 issued its objection decision and informed the appellant that it had filed a late objection which could only be accepted as valid if the appellant paid the admitted withholding tax of Kshs 4,350,842. 00. That the respondent informed the appellant that the objection had not been validly lodged and gave conditions to be met before the appellant's application to file an objection out of time could be allowed.

66. The appellant was further informed by the respondent that the undisputed taxes of Kshs 4,350,842. 00 could not be recovered from the Nairobi County Government since the respondent had not received any confirmation from the County that money was owed.

67. That the appellant requested the respondent to lift the DPO on February 16, 2018. That the respondent responded on February 23, 2018 stating that the same was not possible as the Appellant had since ceased operation in the Country, had no other source of income and had tax liabilities and never provided security.

68. That vide a letter dated March 22, 2018, the Nairobi County Government, in a late response to the agency notice confirmed that it owed the appellant more than Kshs 4,350,842. 00. That it however did not provide any documentation in support of this assertion neither did it provide the exact amount owed to the appellant and hence the same could not be acted upon.

69. That the appellant never appealed the objection decision and consequently the respondent issued agency notices against the appellant since in the absence of an appeal the taxes were due and payable.

70. That the appellant thereafter filed a Judicial Review Application No 219 of 2018 on May 31, 2018 which was dismissed for non-attendance by the appellant.

71. That the appellant has since filed an appeal out of time and the respondent seeks at the first instance to have the appeal struck out with costs to the respondent.

72. That the respondent is empowered under sections 58 and 59 of the Tax Procedures Act to require the production of documents and information to enable the Commissioner ascertain tax liability of a person.

73. The appellant through themselves and/or their agents, were at all times in the course of the investigations, notified and given every opportunity to engage with the officers of the Authority as can be demonstrated by the correspondences exchanged.

74. That the respondent has given the appellant enough time to get access to its premises through the courts to get documentation to enable it respond to the tax demand issued against it.

75. That the appellant herein has failed to produce the documents as required despite being reminded to do so in the letters dated March 3, 2016, March 18, 2016, April 25, 2016 and following the resolution of the meeting on January 5, 2018.

76. That the appellant's director by his designation as the Managing Director of the appellant is the person responsible for the day to day operations of the Appellant and was at all times in the course of the investigations the contact person with the respondent in respect to the tax investigations.

77. That the respondent is aware that the appellant has no other known sources of income, businesses or assets after the seizure and closure of its business by the bank. That it is therefore not true that the actions of the respondent will force it to lay off its workers leading to loss of business and livelihoods of the appellant, its directors and employees. That in consequence, there are no tangible assets to be attached as security for the taxes due and payable.

78. That the appellant's director has failed to provide evidence in support of the business opportunities he alleges to have in Dubai and other regions. That the invitation to the International Infrastructure, Investment and Construction Forum was to the Cabinet Secretary Ministry of Transport, Infrastructure, Housing and Urban Development. That the director did not provide evidence to show his involvement in the forum.

79. That under section 5(1) of cap 469, the respondent was well within its rights to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, securing, collecting and accounting for all revenues in accordance with those laws.

80. That as per its investigations, the respondent established the following taxes as payable:Summary Of Taxes 2014 2013 2012 Total

VAT 63,644,638 120,461,408 19,550,165 203,656,211

Income Tax

15,395,212 15,395,212

WHT 36,200 3,826,183 488,459 4,350,842

Total (Principal) 63,680,837 124,287,591 35,433,837 223,402,265

81. That in view of the foregoing, it is the respondent's considered view that the taxes outlined in its objection decision were raised in conformity with the provisions of the applicable laws and they are due and payable from the appellant.

82. That the onus to prove that the assessment is incorrect and excessive lies on the appellant and where he fails to discharge such duty as the appellant has, the assessment will be confirmed and considered due and payable.

83. That the right of appeal under the Tax Procedures Act is not absolute; it is conditional on the Appellant firstly lodging a valid appeal pursuant to section 51(1) of the Tax Procedures Act (TPA). The section reads:“A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.”

84. That a valid objection under section 51(3) of the TPA, “states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments" and "all relevant documents relating to the objection have been submitted.”

85. That this Tribunal in Transfix Limited vs Commissioner of Domestic Taxes: Misc No 178 of 2022 noted in the absence of a valid objection by a taxpayer, “..there was no decision issued by the Commissioner that could possibly form a basis for an appeal before the Tribunal. In the circumstances the Tribunal finds that there is no conceivable appeal with merit that could be possibly filed by the Applicant for appropriate determination by the Tribunal.” That from the foregoing, the existence of a valid objection before the respondent is sine qua nonto competent appeal filed before the honourable tribunal.

86. That the appellant filed an invalid objection having admitted to be owing WHT of Kshs 4,350,842. 00. That the Appellant in its letter dated January 31, 2018 wrote, “further, we note that the taxes demanded by the Kenya Revenue Authority are currently payable as our client did not file the objection notice within the required timelines of 30 days in accordance with section 51 Subsection 2 of the Tax ProceduresAct. That in view of this we request that you employ your powers outlined under section 51 Subsection 7 of the Tax Procedures Act and allow our client to file a late objection.”

87. That in good faith the respondent provided the appellant time to pay the taxes due in order to validate the appellant’s late objection. That the appellant failed to validate its decision promoting the invalidation decision dated February 21, 2018. which read in part; “based on the above quoted provisions your late objection will only be allowed once the entire amount of tax not in dispute is paid........... Kindly be advised that your late notice of objection and ensuing prayer shall only be allowed once the conditions stated above have been met. Kindly be advised that if the above stated conditions are not met within 14 days from the date of receipt of this letter we shall proceed to confirm the assessment.”

88. That from the foregoing, the respondent unequivocally invalidated the appellant's objection.

89. That this tribunal in Holdwadag Construction Company Limited vs Commissioner of Investigations & Enforcement: in The Tax Appeals Tribunal Appeal No 606 of 2020, extolled the immediacy test prescribed under section 51(4) of the Tax Procedures Act.

90. That further, in Holdwadag Construction Company Limited (supra) the tribunal noted the immediacy test is not cast in stone. That the appellant invites the tribunal to take judicial notice of the appellant’s request in its letter dated January 31, 2018 requesting for more time to validate its decision and the grounds proffered in support of the appeal inter alia that:“Our client has an ongoing dispute with the NIC bank which started in early 2016 over the parcel of land where the company assembly plant is situated. The district even lead to closure of operations in July 2016 and therefore the management have dedicated most of the time in resolving the dispute with the bank in order to resume operations.Most of the records required to resolve the issue with the Kenya revenue authority were locked up at the company's assembly plant and therefore it was impossible to reconcile some of the taxes demanded by the Kenya revenue authority with the view of filing an objection.”

91. That the 21 day period allowed by the respondent for the appellant, (1) to validate its decision coupled (2) request for time to validate its decision and (3) the grounds relied upon militate against a finding of failure to adhere to the immediacy principle. That in light of the foregoing, the appeal before the honourable tribunal is irreparably incompetent.

92. That pursuant to the provisions of section 56(1) of the Tax Procedures Act the burden shall be on the taxpayer to prove that a tax decision is incorrect which the Appellant has failed to do so in this Appeal.

93. That moreover, sections 23(1) of the Tax Procedures Act and 43 of the VAT Act mandates the Appellant to maintain documents required under any tax law and to provide the same upon request by the Respondent. This is to ensure that the taxpayer's tax liabilities can be readily ascertained.

94. That in Kenya Revenue Authority vs Man Diesel & Turbo Se, Kenya [2021] eKLR the court stated:“The shifting of the burden of proof in tax disputes flows from the presumption of correctness, which attaches to the Commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

95. That the court then proceeded to state; “The taxpayer in such cases generally possesses the objective evidence. Certainly, with the exception of filed returns and information provided by the taxpayer, the Revenue authority is in a poor position to establish an affirmative case... Placing the burden of proof in tax cases on the taxpayer reflects the unique nature of the tax system.”

96. That to further buttress the above, the respondent relied on the following cases:a.Pearson vs Belcher CH.M lnspector of Taxes) Tax Cases Volume 38b.Commissioner for her Majesty's Revenue and Customs TC/2017/02292 Saima Khalid Appellant vs The Commissioners For Her Majesty’s Respondents Revenue & Customs; at paragraph 29

97. That a long line of authorities reaffirm a taxpayer's tax obligation pursuant to a clearly defined tax liability prescribed under a taxing act. Section 35 (1)(e) of the Income Tax Act ("ITA") levies withholding tax ("WHT") on deemed interest arising from interest free loans advanced by non-residents to resident taxpayers as chargeable at the appropriate non-resident rate. The section reads:“(1)Every person shall, upon payment of any amount to any non­ resident person not having a permanent establishment in Kenya in respect of (e) interest and deemed interest which is chargeable to tax, deduct therefrom tax at the appropriate non-resident rate;”

98. That the court of appeal in Kenya Revenue Authority vs Republic (Exparte Fintel Ltd) [2019J eKLR: Civil Appeal 311 of 2013 clarified the term "payment" under the ITA is a technical term and its use is as such. Under the ITA, it is synonymous with the term "paid" that means distributed, credited, dealt with or deemed to have been paid on the interest or on behalf of a person. That the court went on to further clarify, “In the context of the Income Tax Act, payment is deemed to have been made even when no money has passed over.....the sense in which the word "deduct" is used, as an accounting term refers to the act or process of subtraction of an item or expenditure from gross income to reduce the amount of income subject to income tax. This need not be done physically but as a book entry.”

99. That the above is further buttressed in Kenya Revenue Authority &another vs Republic (ex parte) Kenya Nut Company Limited [2020] eKLR.

100. That Kenya Revenue Authority (Exparte Fintel Ltd) (supra) held that WHT under section 35(e) of the ITA are due when the loan advanced is repaid or may be deemed payable by the Authority. The Court of Appeal therein agreed with the appellant's (Kenya Revenue Authority) elaboration on the accounting concepts of cash and accrual hence the conclusion. payment is deemed to have been made even when no money has passed over. In Kenya Revenue Authority (Exparte Fintel Ltd)(supra) Fintel Ltd was liable to pay interest to a contractor whom it had failed to honour payments to on the due date as per the terms of the contract therein. As per accounting practices, the interest due to the contractor was recorded as a liability in the respondent's books of accounts.

101. That the persuasive decision in Kenya Commercial Bank Limited vs Kenya Revenue Authority [2016] eKLR where the Court of appeal upheld levying of WHT on interest. In the case, the appellant managed an account in a foreign jurisdiction on behalf of a third party from payments originating in Kenya. The account accrued interest but the same benefits were not remitted to the third party (beneficiary) and thus the appellant's contention that WHT was not due since payment was not made. The court rejected the argument holding the tax was due and deductible/payable.

102. That the applicable rate for WHT under section 35 of the Income Tax Act is provided under the Third Schedule Paragraph 3 (e) as follows:“(i)in respect of interest and deemed interest arising from a Government bearer bond of at least two years' duration and interest, discount or original issue discount, fifteen per cent of the gross sum payable;”

103. That the appellant herein admits to receiving a loan from its parent company a non­ resident. That the appellant in the years 2012 and 2013, declared in its balance sheets to have borrowed loans amounting to Kshs 29,450,630. 00 and Kshs 171,259,419. 00 from its parent company.

104. That the respondent pursuant to section 35 of the Income Tax Act, computed deemed interest at 10% as per the provisions of section 18(3) of the Income Tax Act, which provides as follows:“Ascertainment of gains or profits of business in relation to certain non-resident personsWhere a non-resident person carries on business with a related resident person and the course of such business is such that it produces to the resident person or through its permanent establishment either no profits or less than the ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of such resident person or through its permanent establishment from such business shall be deemed to be of such an amount as might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arm's length.”

105. That section 18(3) supra, grants the respondent the discretion to compute or ascertain the market rate for a benefit that is otherwise veiled in an arm-in-arm relationship. That Black's Law Dictionary 10th edition defines arm-in-arm relationship as, “relating to a transaction between parties whose personal interests are intertwined.” This situation is as opposed to arms' length transaction which is a relation between parties not in close terms and roughly have equal bargain power.

106. That the appellant herein being a subsidiary of a non-resident company that owns 100% of its shareholding is in an arm-in-arm relationship with its parent company. That this assertion is confirmed beyond reasonable doubt by the appellant’s own admission of receiving loans at an interest rate of 0. 001% from its parent company. The respondent invites the honourable Tribunal to take judicial notice that the loan interest between the appellant and the holding company is way below market rates. That suffice to say, such a benefit is unequivocally linked to the arm-in-arm relationship between the parties.

107. That the provisions of section 18(3) of the Income Tax Act therefore allow the respondent to lift the veil of arm-in-arm transactions by treating transactions between such parties under the framework of arm's length transaction to ascertain the market value of such transactions.

108. That in the present case, the respondent determined that a reasonable interest rate on the loan received by the appellant is 10%. That it is imperative to note that the tax rate as provided under the Third Schedule is only applicable upon ascertaining the applicable interest rate and then computing the interest payable on which the Respondent ascertains the payable withholding tax.

109. That an alternative interpretation that adopts the Appellant's proposed interest rate amounts to tax sheltering contrary to the explicit provisions of the applicable tax laws allowing for tax evasion

110. That in regard to withholding tax on professional fees, despite declaring the expenditures in its books of accounts, the Appellant failed to declare and remit withholding tax for audit and legal fees.

111. That under section 10 as read with section 34 of the Income Tax Act, the respondent charged WHT on professional fees offered with respect to legal and audit services.

112. That section 10 of the Income Tax Act reads as follows:“For the purposes of this Act, where a resident person or a person having a permanent establishment in Kenya makes a payment to any other person in respect of-(a)a management or professional fee or training fee;…”

113. That section 34 reads as follows:“Rates of tax(1)Subject to this section-(a)tax upon the total income of an individual, other than that part of the total income comprising wife's employment income, fringe benefits and the qualifying interest, shall be charged for a year of income at the individual rates for that year of income;”

114. That the applicable rate under section 34 is provided under the Third Schedule paragraphs on the resident tax rate:“The resident withholding tax rates shall be-(f)(i) in respect of management or professional fee or training fee, other than contractual fee, the aggregate value of which is twenty-four thousand shillings in a month or more, five per cent of the gross amount payable.”

Respondent’s Prayers 115. The respondent makes the following prayers:a.That the Tribunal upholds the respondent’s decision to invalidate the objection notice dated February 21, 2018 as proper and in conformity with the provisions of the law.b.That this appeal be dismissed with costs to the respondent as the same is devoid of merit.

Issues For Determination 116. The Tribunal upon due consideration of the pleadings and the written submissions of the parties was of the considered view that the Appeal raises the following issues for its determination:a.Whether the appeal is validb.Whether the assessment is justified

Analysis and Determination 117. The Tribunal having established the issues for its determination, proceeded to analyse them as hereunder.a.Whether the Appeal is valid

118. The appellant argued that it received a demand letter for Kshs 103,827,302. 72 on 20th January, 2018 as an additional assessment for the periods 2015 and 2016. That this assessment was not communicated to the appellant by the respondent, when it was done and by whom. That the respondent did not involve the appellant on the process as laid down in the Act. That the appellant therefore, was not accorded due chance to defend its position before, during and after the audit as stipulated in the law

119. The respondent averred that following the issuance of the findings, the Appellant through its director, was invited for a meeting with the Respondent to discuss its tax matters. That the appellant through its director responded seeking an additional 10 days as at the time he was out of the country.

120. That the appellant's director never honored his request and never appeared for a meeting with the respondent at the end of the time duration extended in its favour. That he further could not be reached for more than one year. That the appellant during that period, did not through itself or its agents, did file an objection to the initial findings/ demand.

121. The Tribunal has reviewed the parties’ pleadings and established that the appellant filed an objection on January 31, 2018 in response to the respondent’s findings dated June 28, 2016.

122. Further to the above, the Appellant filed a Memorandum of Appeal dated July 1, 2021 and filed on July 2, 2021 without filing a Notice of Appeal.

123. Section 12 of the Tax Appeals Tribunal Act (TATA), 2013 states as follows regarding the filing of an appeal before the Tribunal:“A person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law may, subject to the provisions of the relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal:”

124. Section 13 of the Tax Appeals Tribunal Act (TATA), 2013 states as follows regarding a Notice of Appeal to the Tribunal:“(1)A notice of appeal to the Tribunal shall—(a)be in writing;(b)be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.(2)The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Clerk, of –(a)a memorandum of appeal;(b)statements of facts; and(c)the tax decision.”

125. The Appellant neither filed a Notice of Appeal nor submitted, to the Tribunal, its objection letter to the Respondent to prove that it objected to the Respondent’s findings dated 28th June, 2016 or to the Respondent’s demand dated 31st January 2018.

126. It is the Tribunal’s considered opinion that sections 12 and 13 of the TATA are couched in mandatory terms and therefore a Notice of Appeal is a mandatory document that must be filed by any person seeking to make an Appeal to the Tribunal.

127. As a result of the foregoing, the Tribunal established that the appellant did not comply with the provisions of sections 12 and 13 of the Tax Appeals Tribunal Act and finds that this Appeal is incompetent.

128. The Tribunal, having found the Appeal to be incompetent and unsustainable in law, did not delve into the other issue for determination, as it was rendered moot.

Final Decision 129. In view of the foregoing, the Tribunal finds that the Appeal is incompetent and accordingly makes the following orders: -a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

130. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ERIC N. WAFULA.......................CHAIRMANCYNTHIA B. MAYAKA....................MEMBERGRACE MUKUHA.............................MEMBERJEPHTHAH NJAGI............................MEMBERABRAHAM K. KIPROTICH.............MEMBER