[2024] KETAT 1089 (KLR)

Fuel Link Energy Limited v Commissioner of Investigation and nforcement (Tax Appeal E071 of 2021) [2024] KETAT 1089 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 1089 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E071 of 2021

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

June 28, 2024

Between

Fuel Link Energy Limited

Appellant

and

Commissioner of Investigation and nforcement

Respondent

Judgment

1. The Appellant is a limited liability company duly incorporated in Kenya and is a registered taxpayer whose principal business is import, export and wholesale of petroleum products except LPG.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. The Respondent conducted an investigation on the Appellant for the periods 2017 to 2019 to ascertain its tax compliance status on Income tax, Value Added Tax, Customs tax, and Corporation tax,

4. On 12th January 2022, the Respondent issued the Appellant with a notice of additional tax assessments for the period 2017 - 2019 with a tax liability amounting to Kshs. 347,394,704. 00

5. The Appellant filed a notice of objection on 11th February 2022.

6. On 4th March 2022, the Respondent invalidated the Appellant’s notice of objection for failure to meet the requirements of Section 51(3) of the TPA.

7. On 23rd January 2023, the Respondent confirmed the assessments.

8. The Appellant, aggrieved with the Respondent’s decision, lodged this Appeal at the Tribunal on 21st February 2023.

The Appeal 9. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated and filed on 6th March 2023:a.That the Commissioner erred in law and in fact, by not taking into consideration the support documents provided to him/her from the date his request for information was addressed vide a letter dated 24th October 2020 and subsequent response to his/her findings on a letter dated 10th June 2021. Additional information requested vide an email was further provided on the 29th July 2022. b.That the Commissioner erred in law and in fact by assessing the taxpayer on the gross deposits with no consideration for interbank transfers, customer deposits, and short-term advances to the taxpayer.c.That the Commissioner erred in law and in fact by using the Gross Profit Margin (GPA. instead of Net Profit Margin {NPM) contrary to Section 15(I) of the Income Tax Act. That the Commissioner erred in law and, in fact, by applying the corporation tax rate to the gross banking without consideration of the purchases and expenses incurred contrary to the provisions of Section 15 of the Income Tax Act despite the gross errors in the banking analysis.d.That the Commissioner erred in law and in fact, that transit bonds will never be discharged by the Customs Department of KRA without the transit fuel exiting the borders and that the declarant, being Kenfreight E.A. Ltd, should be held responsible for any purported diversion.e.That the Commissioner erred in law and, in fact, by not taking into consideration the principal-agent relationship between the company and directors and to that effect, the directors received and expended funds on the company's behalf and subjecting the bank deposits of the directors is not only outrageous but has no legal and logical backing.f.That Commissioner erred in law by failing to issue its decision within the stipulated time of sixty days per Section 51 (11) of the Tax Procedure Act, 2015. The Commissioner ought to have issued his/her decision on our earlier objection dated 10th June 2021 and received by him on 23rd June 2021. This decision was supposed to be communicated on or before 8th August 2021 in compliance with the sixty days' statutory provision on the contrary of which the Commissioner issued a notice of assessment almost seven months after our validly lodged objection.f.The commissioner further erred in law by not communicating his decision to our objection dated 9th February 2022 and his subsequent request for additional information on the 22nd July 2022, which we duly responded to on the 29th July 2022, from which date going by the provisions of Section 51 (11) of the TPA, 2015 he ought to have communicated his decision on or before 27th September 2022

Appellant’s Case 10. The Appellant’s case is premised on its Statement of Facts dated and filed on 6th March 2023.

11. The Appellant averred that the Respondent erred by relying on banking deposits to arrive at its assessments dated 12th January 2022 despite the fact of it having explained to the Respondent in its various correspondences of the errors in the banking analysis which included use of Gross profit Margin instead of Net profit Margin, interbank transfers, banking analysis not adjusted for input VAT and own cash deposits made to clear suppliers cheques.

12. The Appellant submitted that it lodged a notice of objection to the tax assessment on 9th February 2022. That the Respondent requested for additional information via email on 10th March 2022, that this was followed by several meetings between the parties.

13. The Appellant averred that the Respondent requested for additional information in writing on 22nd July 2022 whereupon it provided the requested information on 29th July 2022.

14. The Appellant averred that having provided additional information on 29th July 2022, the statutory sixty day period for the Respondent to render its objection decision ought to have been 27th September 2022 as per the provisions of Section 51 (11) of the TPA which provides:-“where the Commissioner has not made an objection decision within sixty days from the date that the taxpayer lodged a notice of the objection, the objection be deemed allowed”

15. The Appellant averred that Section 51 (8) of the TPA, 2015 further provides that:“where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and the Commissioner's decision shall be referred to as an "objection decision"

16. The Appellant averred that the Respondent failed to render an objection decision in contravention to Section 51 (9) of the TPA, 2015 which provides that:“The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment"

17. The Appellant averred that the Respondent’s failure to render its objection decision within the statutory timelines provided under Section 51(11) of the TPA meant that the objection had been allowed by operation of the law.

18. The Appellant relied on the case of Equity Group Holdings Limited -vs-Commissioner of Domestic Taxes [2021] KEHC 25 (KLR), where it was stated that:-“The TAT rightly computed time and pronounced that the objection decision was rendered out of time. This being the position, then by dint of the above provision, the objection decision is deemed to have been allowed. The Act requires that where the Commissioner has not made an objection decision within 60 days from the date the taxpayer lodged the notice of objection, the objection shall be allowed. This means that the issues that the taxpayer had raised in the notice of objection will be accepted. In case of a tax assessment, it will be vacated."60. "Section 51 (11) of the TPA is couched in peremptory terms. Having correctly found that the decision was made after the expiry 60 days. The TAT had no legal basis to proceed as it did and to invoke article 159 (2) (i First, there was no decision at all. The decision had ceased to exist by operation of the law. Second, the provisions of section 51 (11) (b) had kicked in. The objection had by dint of the said provision been deemed as allowed. Third, the TAT had no discretion to either extent time or to entertain the matter further. Fourth, discretion follows the law and a tribunal cannot purport to exercise discretion in clear breach of the law."

19. The Appellant further relied on the case of Republic -vs- Commissioner of Customs Services Ex-Parte Unilever Kenya Limited [2012) eKLR, where Korir J, stated that:“My understanding of the above quoted section is that once a taxpayer lodges an application for review, the Commissioner of Customs who is the respondent in this case has 30 days within which to make and communicate a decision to the taxpayer. If the respondent does not communicate a decision within 30 days, then the respondent "shall be deemed to have made a decision to allow the application. " The law is so clear that it can only be interpreted in one way…. The respondent communicated the decision to the ex-parte applicant on 18th July 2011. By communicating the decision four months from 16th March 2011 the respondent was clearly in breach of the provisions of section 229 EACCMA…. the implication of the respondent's non-communication within the statutory period of 30 days is that the ex- parte applicant did not owe the taxes demanded by the demand notice on 9th February, 2011. The respondent's decision in the letter dated 18th July 2011 which revised the tax demanded downwards from Kshs. 102,254,601. 00 to Kshs. 65,335,378. 00 was therefore void from the beginning. The law as it is presumes that by failing to communicate a decision by 16th April 2011 the respondent was telling the ex-parte applicant that its appeal against the tax demand contained in the notice dated 9th February 2011 and was allowed and the ex-parte applicant did not owe the respondent any tax in respect of the particular demand”

20. The Appellant further relied on the case of Louis Dreyfus Company (K) Ltd V. Kenya Breweries Authority (2021) eKLR, it was held;“that non-compliance with section 51 (11) renders the objection to be deemed as admitted”

Appellant’s Prayers 21. The Appellant prayed that the Tribunal finds:i.That the Appellant's validly lodged objection on 21st June 2021 is allowed through the operation of the law in accordance with Section 51ii.of the TPA, 2015 and set aside the Respondent's notice of assessment on 12th January 2022. iii.That the Appellant's objection communication dated 9th February 2022 and the subsequent share of information on 29th July 2022 stand allowed by operation of the law in accordance with Section 51 (11) of the TPA, 2015, set aside the Respondent's confirmation of the assessment decision dated 23rd January 2023. iv.For costs of the Appeal.

Respondent’s Case 22. The Respondent’s case is premised on the following documents before the Tribunal:a.The Respondent’s Statement of Facts dated 30th March 2023 and filed on 31st March 2023b.The Respondent’s Written Submissions dated 19th October 2023 and filed on 20th October 2023

23. The Respondent averred that it wrote to the Appellant on 4th March 2022 informing it of the invalidity of its objection and requiring it to validate it within 7 days by complying with the requirements of Section 51(3) of the TPA.

24. The Respondent submitted that Section 51 (3) of the Tax Procedure Act provides that:-“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or as applied for an extension of time to pay the tax not in dispute under section 33(1); andc.all the relevant documents relating to the objection have been submitted.”

25. The Respondent averred that the Appellant did not provide the said documents despite reminders sent via email on 10th March 2022 and 22nd July 2022. That therefore, the Appellant failed to provide proof to discredit the Respondent's analysis and assessment.

26. The Respondent relied on the case of Obama Enterprises Limited V. Commissioner of Domestic Taxes (TAT 667 OF 2021), where the Tribunal held that;“The upshot of the foregoing is that the Appellant's notice of objection having been lodged late and not having been supported by the necessary documentation the same is deemed to be invalid as envisaged under Section 51 (3) of the Tax Procedures Act which provides as follows:A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-(a)....(b)....c.all the relevant documents relating to the objection have been submitted."

27. The Respondent averred that Section 24 (1) of the Tax Procedure Act places a duty upon a taxpayer to submit a tax return to the Commissioner in the prescribed form. The Section provides that:-“A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.”

28. The Respondent submitted further that Section 31 of the Tax Procedures Act empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the Commissioner's best judgement. That this Section provides thus:-“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—a.....b.....c.in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

29. The Respondent relied on the case of Digital Box Limited Vs Commissioner of Domestic Taxes (TAT Appeal No. 115 of 2017] that addressed what amounts to best judgment in paragraphs 104 & 105 of its judgment as follows: -“The Tribunal must then address itself on what amounts to best judgment. This question has been dealt with severally by the courts. In the case of Van Boeckel v C & E QB Dec 1980, [1981] STC 290 Woolf J stated that: "the very use of the word judgment' makes it clear that the Commissioners are required to exercise their powers in such a way that they make a value judgement on the material which is before them. Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is due..... What the words 'best of their judgment' envisage, in my view, is that the commissioners will fairly consider all material placed before them and on that material come to a decision which is one which is reasonable and amount of tax which is due. As long as there is some material on which the commissioner's act then they are not required to carry out investigations which may or may not result in further material being placed before them."

30. The Respondent averred that Section 56 (1) of the Tax Procedure Act provides that:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect."

31. The Respondent submitted further that Section 30 of the Tax Appeals Tribunal Act provides as follows:“In a proceeding before the Tribunal, the Appellant has the burden of proving-a.where an appeal, relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently."

32. The Respondent relied on the case of Ushindi Exporters Limited V. Commissioner of Investigation and Enforcement (Tax Appeal Tribunal No. 7 of 2015), where the Tribunal pronounced itself that:"The burden of proving that the lax assessment is excessive or should have been made differently never shifts to the Respondent and is placed squarely on the Appellant as Section 30 (a) and (b) of the Tax Appeals Tribunal Act states,a.Where an appeal related to an assessment, that the assessment excessive; orb.In any other case, that the tax decision, should not have been made or should have been made differentlyBy purporting to shift the burden of proving that the tax assessment against it was incorrect or should have been different the Appellant failed in discharging the burden, placed upon it by law."

33. The Respondent submitted that there was no substantiating proof in support of the objection or assertions by the Appellant hence the Appellant did not discharge the onus of proof as provided for under Section 56 (1) of the Tax Procedure Act and Section 30 of the Tax Appeals Tribunal Act.

Respondent’s Prayers 34. The Respondent prayed this Tribunal;a)Upholds the Respondent's Confirmation assessment notice dated 21st January 2023. b.Dismisses the Appeal with costs to the Respondent as the same is devoid any merit.

Issues for Determination 35. The Tribunal has carefully studied the pleadings, submissions and documentation filed by both parties and is of the view that the issues falling for its determination are:-i.Whether the Appellant’s Notice of Objection was allowed by operation of the lawii.Whether the Respondent’s Invalidation of the Appellant’sObjection and subsequent Confirmation of Assessments on 23rd January 2023 was justified and proper in law.

Analysis and Findings 36. Having identified the issues that fell for its determination, the Tribunal proceeded to analyse them as hereunder:-i.Whether the Appellant’s Notice of Objection was allowed by operation of the law

37. The genesis of this Appeal is the additional assessments raised by the Respondent based on variances established following investigations and analysis conducted by the Respondent.

38. The Respondent explained that it conducted investigations into the Appellant’s tax affairs and also carried out banking analysis to determine the Appellant’s tax obligation.

39. That the investigations revealed variances in the Appellant’s VAT, Customs tax and Income tax returns leading to the additional assessments.

40. The Appellant’s main contention in this Appeal is the Respondent’s failure to issue an objection decision in time as required by statute.

41. The Appellant averred that having provided additional information on 29th July 2022, the statutory sixty day period for the Respondent to render its objection ought to have ended on 27th September 2022.

42. The Appellant averred that the Respondent’s confirmation of assessment on 23rd January 2023 was outside the statutory timeline of 60 days provided under Section 51(11) of the TPA.

43. The Tribunal revisited the chronology of the events with a view to determine whether the parties complied with the statutory procedures and timelines before delving into the substance of the Appeal. The events leading to the instant Appeal were as follows:-i.On 12th January 2022, the Respondent issued the Appellant with a notice of additional tax assessments.ii.The Appellant filed a notice of objection dated 9th February 2022 received by the Respondent on 11th February 2022. iii.On 4th March 2022, the Respondent invalidated the Appellant’s notice of objection for failure to meet the requirements of Section 51(3) of the TPA and called for all relevant documents.iv.On 9th March 2022 the Appellant and the Respondent had a meeting as a result of which the Respondent requested for additional information via email on 10th March 2022. v.On 22nd July 2022, the Respondent reminded the Appellant to provide the information that had been requested earlier.vi.On 29th July 2022, the Appellant alleged that it provided the Respondent with additional information.vii.On 23rd January 2023, the Respondent confirmed the tax assessments.viii.The Appellant lodged this Appeal at the Tribunal on 21st February 2023.

44. The Commissioner is enjoined under Section 51(11) of the Tax Procedures Act to make an objection decision within 60 days from the date of receipt of a valid notice of objection, The Section provides as thus:-“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

45. The Respondent contended that the Appellant’s objection as lodged was invalid and that the same was communicated to the Appellant on 4th March 2022 whereupon it was requested to provide all relevant documents in compliance with Section 51(3) of the TPA so as to validate the objection.

46. On 10th March 2022, the Respondent requested for the following documents from the Appellant via email:Corporate Taxi.Evidence to show the non-income deposits brought to chargeii.Evidence of the operating costs, finance costs, cost of sales Custom Dutiesiii.Evidence of localisation of fueliv.Evidence that the monies brought to charge were not the directors’ income and that the same were company funds already taxed on the company.

47. The Respondent submitted that it sent its final reminder to the Appellant on email for the said additional information on 22nd July 2022 to which it did not receive a response.

48. The Appellant on its part submitted that it provided the requisite additional information on 29th July 2022, it attached a copy of the forwarding email. The Tribunal perused the said correspondence of 29th July 2022 and noted that besides providing explanations on the various tax heads, the Appellant attached two documents:i.Schedule of Interbank transfersii.An excel analysis of receipts from lenders.

49. The bone of contention is that the Appellant averred that it provided the Respondent with information and documents on 29th July 2022 while the Respondent maintained that it did not receive the said documents. The copy of email provided by the Appellant shows that the email address to which the correspondence was sent is the same as that through which the information had been requested by the Respondent on 22nd July 2022.

50. The Tribunal was then faced with the question as to whether the Appellant by sending the information and documentation it alleges to have sent on 20th July 2022 to the Respondent’s email had complied with the requirements of Section 51(3) of the TPA on validation of the notice of objection so as to set the sixty day timeline for issuance of the objection decision provided for in Section 51(11) of the TPA in motion.

51. To determine this, the Tribunal took a cursory look at the Respondent’s request for information and documents on 10th March 2022 vis-a-vis the information and documentation provided by the Appellant on 29th July 2022. The Tribunal reached the conclusion that the Appellant did not provide the full set of documentation as requested by the Appellant.

52. Having reached the conclusion above, the Tribunal was persuaded that time could not begin running on the basis of a notice of objection that was yet to comply with Section 51(3)(c) of the TPA.

53. The Tribunal therefore finds that the Appellant’s notice of objection was not allowed by operation of the law.ii.Whether the Respondent’s Invalidation of the Appellant’s Objection and subsequent Confirmation of Assessments on 23rd January 2023 was justified and proper in law.

54. The Respondent averred that the Appellant lodged an invalid Objection which did not meet the threshold set out by Section 51(3) of the TPA and that it failed to validate its objection despite reminders sent via email on 10th March 2022 and 22nd July 2022.

55. The Appellant on its part submitted that it had provided the requisite information on 29th July 2022. The Appellant provided a copy of the email, letter and documents attached thereof to the Tribunal.

56. Section 51(3) enjoins the Appellant to provide all relevant documentation to enable determination of its tax liability, the Tribunal notes that it is in the Respondent’s place to determine whether the documents so provided are sufficient or otherwise.

57. Whereas the Tribunal notes that the Appellant provided part of the documents requested in the Respondent’s letter of 10th March 2022. The Respondent submitted that it did not receive the said documents in the absence of which it was left with no option but to invalidate the Appellant’s objection.

58. The Tribunal is of the view that the Respondent’s invalidation of the Appellant’s objection cannot be upheld without the import of the said documents being brought to bear on the Respondent’s decision the same having been sent to the Respondent’s bonafide email address.

59. Whereas the burden of proof lies squarely on the Appellant, courts have held that once the Appellant provides information then the burden shifts and the case must be determined on the basis of the evidence so provided. This position was explained in the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR, where Mativo J (as he then was) adopted the doctrine in the Canadian Supreme Court case of Johnston v Minister of National Revenue where the court {1948} S.C.R. 486 where the court decided that:“… the onus is on the taxpayer to “demolish the basic fact on which the taxation rested.”gain, the Supreme Court of Canada provided guidance on this issue in Hickman Motors Ltd. v Canada which held that the onus is met when a Taxpayer makes out at least a prima facie case. Prima facie is another legal term that literally means “on its face.” To prove a case “on its face” you must provide evidence that, unless rebutted, would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed”

60. This fact that the burden of proof in tax cases is not stationary was explained inCommissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment) where Justice Majanja stated as thus:“I agree with the Tribunal’s holding that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer.” 61. Having held that the Appellant had provided the documents that had been requested by the Respondent the best cause of action in the foregoing circumstances would be to refer the matter back to the Respondent to consider the documents supplied on 29th July 2022 and issue its objection decision thereof.

Final Decision 62. The upshot of the foregoing analysis is that the Appeal partially succeeds and Consequently the Tribunal proceeds to make the following Orders: -a.The Appeal be and is hereby partially allowed.b.The Respondent’s Confirmation of assessment dated 23rd January 2023 be and is hereby set aside.c.The Respondent is hereby directed to consider the information and documents in the Appellant’s letter of 29th July 2022 and thereby proceed to issue an objection decision within Sixty (60) days from the date of delivery of this Judgment.d.Each Party to bear its own costs.

62. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE, 2024. ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBERIMOTHY B. VIKIRU - MEMBER