[2024] KETAT 1043 (KLR)

Heineken East Africa Import Company Ltd v Commissioner of Investigation & Enforcement (Tax Appeal E021 of 2023) [2024] KETAT 1043 (KLR) (Civ) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 1043 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E021 of 2023

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

June 28, 2024

Between

Heineken East Africa Import Company Ltd

Appellant

and

Commissioner of Investigation & Enforcement

Respondent

Judgment

Bckground 1. The Appellant is a limited liability company incorporated in Kenya and an affiliate of Heineken Holdings N. V (“Heineken Holdings”. The principal business of the Kenyan entity during the review period was importing and distributing Heineken beverages in East Africa.

2. The Respondent is a principal officer appointed under Section 13 of the KRA Act, and the Kenya Revenue Authority is charged with the responsibility of assessing, collecting, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent vide a letter dated 13th September 2021 issued a notice of tax investigation to the Appellant covering the period 2016 to 2021. Thereafter the parties engaged through email correspondences and exchange of documents.

4. The Respondent shared with the Appellant the investigation findings vide a letter dated 22nd October 2021 indicating tax due amounting to Kshs 1,316,937,856. 00.

5. The Appellant replied vide a letter dated 14th December 2021. The parties held a Meeting on 23rd August 2022 to review documents and receive explanations from the Appellant.

6. The Respondent further requested for documents vide a letter dated 23rd August 2022. The Appellant replied vide emails dated 30th August 2022, 6th September 2022 and 22nd September 2022 and provided additional information and documents.

7. The Respondent subsequently issued its notice of assessment dated 28th September 2022 demanding total taxes amounting to Kshs 2,147,034,458. 00 being Kshs 1,644,773,599 for Customs taxes, Kshs 197,260,962 for Corporation income tax, Kshs 245,637,030 for VAT and Kshs 245,637,030 for Withholding tax.

8. The Appellant objected to the assessment vide a letter dated 28th October 2022. Subsequently, the Respondent issued the Objection decision on 23rd December 2022 confirming total taxes amounting to Kshs 502,260,859. 00 being Corporate income tax of Kshs 197,260,962. 00, VAT of Kshs 245,637,030. 00 and WHT of Kshs 59,362,867. 00.

9. Dissatisfied with the Respondent’s Objection decision, the Appellant filed a Notice of Appeal on the 20th January 2022.

The Appeal 10. The Appellant’s Amended Memorandum of Appeal filed on 9th October 2023 is premised on the following grounds:i.The Respondent erred in law and acted ultra vires by issuing an assessment in respect of the year 2016 contrary to statutory provisions providing for a statutory timelines within which assessments should be issued-five years.ii.The Respondent erred in law and fact by resorting to using banking analysis to determine the Appellant's taxable income under the Income Tax Act and taxable supplies under the VAT Act despite the Appellant having provided all the relevant documentation and there was no basis in law for the Respondent to estimate taxes payable based on bank deposits.iii.The Respondent erred in law and fact by using indirect means to arrive at an estimated tax liability assessment that was unreasonable and unjust.iii.The Respondent erred in facts and in law by erroneously deeming interest on Heineken's trade payables and on an interest free trade loan from Heineken International contrary to the law.iii.The Respondent erred in law and fact by confirming its assessment disallowing unrealized foreign exchange loss.iii.Without prejudice to ground I-V above, the Respondent's assessment using banking analysis was erroneous for failing to consider several reconciling items thereby subjecting the Appellant to undue taxation.iii.Without prejudice to ground IV above, the Respondent erred in law by assessing the Appellant for WHT for the period 2016 up to 7th November 2019 without any legal authority as if it was due and payable by the Appellant. The assessment for WHT is thus illegal, un-procedural and ultra vires.

Appellant’s Case 11. The Appellant’s case is premised on the following documents filed before the Tribunal;i.The Appellant’s Statement of Facts dated 3rd February 2023 and filed on the same date together with the documents attached thereto.ii.The Appellant’s Supplementary Statement of Facts dated 6th October 2023 and filed on 9th October 2023. iii.The Appellant’s witness statement of Corina Parsu dated 30th August 2023 and admitted as evidence in chief on 22nd November 2023. iv.The Appellant’s Written Submissions dated 11th December 2023 together with authorities attached.

12. The Appellant expounded on its grounds of Appeal as hereunder;i.The Respondent erred in law and acted uvires by issuing an assessment in respect of the year 2016 contrary to statutory provisions providing for a statutory timeline of five years.

13. The Appellant submitted that the Respondent assessed it for the years 2016 - 2020 and issued its assessment on 28th September 2022. That on 23rd December 2022, the Respondent issued a decision confirming the taxes arising from the assessment. This included an amount of Ksh 13,490,033. 00 demanded in respect of the 2016 tax period.

14. That the Respondent is mandated to impose and collect taxes only in accordance with the Constitution and legislation. That the law prescribes that the Respondent is only legally allowed to make amendments to the Appellant's tax assessment and demand taxes within a period of five years as provided for at Sections 23 (1)(c) and 31(4)(a)(b) of the Tax Procedures Act.

15. It averred that in the assessment issued in 2022, the Respondent is only entitled to issue amended assessments for the years 2017 onwards. That any assessment issued for years prior to 2017 would by dint of Section 31(4)(b), be deemed outside statutory timelines hence an action that is ultra vires.

16. The Appellant’s position was that the statutory timelines are not enacted in vain. That they are a key component of safeguards enacted to ensure due process. That this Tribunal with concurrence of Superior Courts have in numerous decisions emphasized that unless there is fraud the Respondent should not attempt to peak into the affairs of the Appellant beyond the five-year statutory limit.

17. That Justice Weldon Korir in a High Court case of Republic -vs- Commissioner, Domestic Taxes (Ex parte Affiliated Business Contacts Ltd) JR No.343 of 2013, agreed with the above assertion stating that;“..parliament deemed it necessary that unless there is fraud or gross or willful neglect on the part "of the taxpayer, an assessment can only be made any time prior to the expiry of seven years after the year of income to which the assessment relates. It would therefore be unreasonable to demand tax eleven years after the assessment when it is quite clear that the upper limit for assessment is seven years. Where tax has been assessed, the Respondent should endeavor to recover the same within reasonable time."

18. That the Judge further pointed out that:“…the Respondent has a responsibility to collect taxes, but that duty must be exercised reasonably".

19. The Appellant submitted that the same yardstick should be applied in this case. That it would be contrary to the law as elucidated above if the Respondent's indiscretion is permitted without sanction.

20. The Appellant contended that the Respondent had not in any correspondence adduced herein alleged or proven to the standards required in law that there was fraud on the part of the Appellant. That the Respondent's failure to submit any evidence of fraud as anticipated by the Tax Procedures Act means that it had no grounds to ignore the five-year statutory limit.

ii. The Respondent erred in law and fact by resorting to banking analysis to determine the Appellant's taxable income under the Income Tax Act and taxable supplies under the VAT Act despite the Appellant having provided all the relevant documentation and there was no basis in law for the Respondent to estimate taxes payable based on bank deposits. 21. The Appellant stated that in compliance with the law filed its tax returns declaring the audited sales and revenue figures. That however, the Respondent disregard these figures and resorted to using the bank deposits analysis method to determine the Appellant's tax liability.

22. That the Respondent determined the Appellant's taxable Corporate income tax and VAT on sales for the years under review by relying on bank deposits in three of the Appellant's bank accounts held at CitiBank.

23. That the Respondent has in its Objection decision confirmed the assessment arrived at through an estimation of sales based on a bank deposits analysis despite the fact that the Appellant provided all the relevant documentation relating to its sales including its audited financial statements.

24. The Appellant averred that its business is that of sale and distribution of excisable goods being imported beer, which business is statutorily regulated through the provisions of the Excise Duty Act and the East African Community Customs Management Act ("EACCMA"). That indeed all beer import records and excisable goods sales records are within the Respondent's disposal through the various tax management systems it has in place to monitor the import and sale of such imported excisable goods.

25. The Appellant posited that bank deposits analysis is an indirect method of tax liability determination (an approximation) through which the Commissioner seeks to show by circumstantial means - that a taxpayer had income/taxable sales that were not reported. That the court in a United Stated case; United States v.Bray, 546 F.2d 851, 856 (10th Cir.1976) opined that “the bank deposits method of proof is not an exact science”.

26. That the use of the bank deposit analysis and other indirect methods should be done sparingly and in exceptional circumstances. That the OECD Guidelines notes that:-“For many taxpayers, particularly those in the SME sector, there is a considerable risk that some income will not be reported by them in their returns in order to minimise their taxable income. This is especially true for those taxpayers where it is easy to conceal income, as the income is not subject to any systematic third-party reporting to the revenue body and/or it is difficult for auditors to otherwise directly verify such income with third party sources. There is also the risk that expenses against business income may be overstated by taxpayers to reduce their reported taxable income. A further complication may arise when conducting an audit as a result of a taxpayer's poor quality, or non-existent, books and records. For these reasons, auditors need a set of tools to indirectly measure taxpayers' taxable income."

27. That based on the above, the motivations for use of indirect methods should be very clear and depend on the circumstances of the taxpayer such as the sectors of the economy that they operate and the unavailability of records.

28. That furthermore, it was the practice of other revenue authorities to resort to the banking analysis method only in such circumstances. It stated that according to the Tax Administration of Kosovo: Public Explanatory Decision No. Oi/20i5 On Indirect Audit Methods published by the Tax Administration of Kosovo at page 3 of 5. States thus;“Prior to using an indirect method of determining a tax liability, Tax Administration of Kosovo (TAK) must attempt to determine the correct tax liability using regular direct methods of auditing books and records of the taxpayer.”

29. The Appellant submitted that the Inland Revenue Department of The Government of Hong Kong Special Administrative Region of the People's Republic of China's position on the use of indirect method of tax assessment is that:“A key element in determining the appropriate method of quantification to be used is the reliability of the taxpayer's books and records. If they are reliable, a "direct" approach can be used, whereas if they are incomplete or unreliable, an “indirect” method will be called for.”

30. That in Mendelson v. Commissioner 305 F.2d 519 (7th Cir. 1962), where a taxpayer had failed to keep any records of her income during the years in question. The American revenue authority used an indirect method to assess her income which the court found reasonable. That according to the court;“all taxpayers.........by failure to keep records of their income assume the hazard that they may be called upon to pay a tax based on an income which cannot be determined with certainty.”

31. That in Schroeder v. Commissioner 40 T. C. 30(1963) the court found that when a taxpayer keeps no records, there is no alternative but to calculate income “in the most reasonable way possible."

32. The Appellant stated that the Respondent did not attempt to satisfy itself whether there were any reasons that necessitated the use of banking deposit analysis. That the Appellant provided all the documents that a business in the Appellant's position is required to keep. These included audited financial accounts that have been prepared by a reputable auditor. That the reliability of the accounts has never been questioned by the Respondent.

33. It submitted that the Appellant spends a considerable amount of resources to ensure that its financial records are kept in a manner that would enable the Respondent to undertake a direct approach to determining tax liability. That the Appellant, in the least, expected reasons why these records were inadequate or unreliable before the Respondent could undertake to use the bank deposit analysis method.

34. The Appellant submitted that while the Respondent can use banking analysis method its circumstances did not require it to and therefore the assessment should be set aside.

iii. The Respondent erred in law and fact by using indirect means to arrive at an estimated tax liability assessment that was unreasonable and unjust 35. The Appellant submitted that the Respondent in its Objection decision upheld its assessment which imputed that the Appellant had undertaken sales of Kshs 2,591,899,855. 00 which were not declared in its Income tax returns and Kshs 1,492,297,862. 00 which were not declared in its VAT returns.

36. That any form of assessment adopted by the Respondent is subject to the provisions of the Tax Procedures Act which empowers the Respondent to assess a taxpayer but should exercise good judgement. That Section 31 (1) of the Tax Procedures Act provides as follows:-“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 judgment, to the original assessment of a taxpayer..."

37. That the Respondent's duty to exercise good judgement in its assessment extends to indirect methods of assessment. It stated that in Family Signature Ltd vs The Commissioner of Investigations &Enforcement Nairobi TAT No. 25 of 2016, one of the issues for determination was whether the Respondent was justified in employing an alternative and indirect method of assessing the Appellant's estimated tax liability" the 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 judgment informed by pragmatic and reasonable considerations that do not in any manner result in a ridiculously high-income margin".

38. That the Respondent's assessment was not informed by pragmatic nor reasonable considerations thereby resulting in an erroneous assessment. The Appellant stated that it supplied the Respondent with its records relating to its sales and its audited financials. That the Respondent has to date never raised any queries on the financials so as to justify the resort to an alternative method of estimating taxable income and the Appellant’s taxable supplies.

39. That further, the implication of the Respondent's assessment is that the Appellant undertook sales of beer in the Kenyan market amounting to billions of shillings without declaring the same. It averred that given the unique circumstances and the controls in the alcoholic beverages sector this assertion was unreasonable. That each bottle of beer sold by the Appellant is required to bear an Excise stamp as provided for in the Excise Duty Act. That the excise stamps are issued by the Respondent and enable the Respondent to electronically monitor each sale made by the Appellant since the stamps are activated once a bottle is sold.

40. That for the Appellant to sell its imported excisable goods within the Country, the same have to be affixed with Excise stamps which are regulated by the Respondent's Excise Goods Management System. That it is therefore strange for the Respondent to allege that the Appellant made sales of Kshs 2,591,899,855. 00 or Kshs 1,492,297,862. 00 without the Respondent's knowledge and without declaring the same. That it would mean that the Appellant sold the beer without excise stamps, or the Appellant sold the goods using fake or counterfeit stamps which the Respondent has not alleged nor proved implicitly or explicitly.

41. The Appellant further averred that at the point of issuing its preliminary findings in its letter of 22nd October 2021, the Respondent had raised an issue of excise stamp reconciliation. That this issue was however dropped while issuing its assessment upon the Respondent satisfying itself, based on a EGMS system generated reconciliation and the Appellant's documentation, that the Appellant had fully accounted for its excise stamps.

42. That the Respondent's assessment was therefore erroneous and exaggerated as the Respondent has not alleged that the Appellant violated the provisions of either Excise Duty Act or EACCMA thereby made unreported sales within the Country for the purpose of generating the revenue that the Respondent wishes to subject to VAT and CIT. That the Honourable Tribunal in London Distillers (K) Limited -Vs-Commissioner of Domestic Taxes the Appeal determined that a theoretical analysis such as in this case should be subjected to market realities. It averred that the Tribunal held that;“The Tribunal is also aware of the glaring fact that in as much as the Respondent has computed an assessment based on bottles purchased and used, the Respondent has neither stated how the product that was supposedly packaged in the said bottles was produced nor whether the said product was sold in the market with or without excise stamps. It is evident to the Tribunal, based on the law, that excisable goods should not be sold without the affixation of excise stamps. In this regard, it would be expected that if there were products released into the market by the Appellant, it would have excise stamps activated and affixed in the absence of which the said products would be in the market without stamps or with fake stamps. Neither of these two latter scenarios have been raised by the Respondent in its findings and its assessment begging the question as to how the product in the computed (extra) bottles was produced and how it entered the market from the perspective of stamps affixation."

43. The Appellant averred that any implication by the Respondent that the Appellant sold beer without stamps or with counterfeit stamps is by law required to be supported by proof as such would be alleging that the Appellant was committing a tax offence and/or engaging in tax evasion.That the Tribunal in the London Distillers (K) Limited case held that the moment the Respondent accused the Appellant of tax evasion the burden of proof shifted to it to prove the allegation and the standard of proof was higher than the normal standard of the balance of probability. That the Tribunal noted at paragraph 169 and 172 of its judgement that:“169. The Tribunal's position is that the burden of proof, which essentially in law rests upon the Appellant, shifted to the Respondent at the point where issues of tax evasion were raised. 172. It is the Tribunal's view that the Respondent, in this Appeal, did not dispense with the above requirements of the Evidence Act in respect to tax evasion. Furthermore, the standard of proof in such cases is distinctively higher than the normal standard of the balance of probability and the Respondent did not attain or satisfy that proof. Under the circumstances therefore, the Tribunal noted that other than merely stating that there were issues relating to tax evasion involving the Appellant herein, the Respondent failed to prove it on the part of the Appellant to the satisfaction of the Tribunal.”

44. It contended that the Respondent in this case had failed to appreciate that it had the onerous responsibility to act reasonably by exercising best judgement informed by pragmatic and reasonable considerations. That nothing would have been easier, given the mammoth of resources that the Respondent has, than to ascertain/investigate and provide proof to support the banking analysis findings on how the Appellant was generating revenue that was not being taxed.

45. The Appellant averred that the Respondent's findings that there were actual sales made by the Appellant and not declared ought to have been supported by proof since the sale of beer is tightly controlled by the Respondent itself.

46. The Appellant averred that the Respondent acted unjustly as further to raising an estimated assessment that was grossly exaggerated. That the Respondent had to date never provided the Appellant with any queries on its sales records and financial statements to explain why the Respondent opted to result in an indirect method of arriving at an estimated assessment.

iv. The Respondent erred in law and fact by demanding Withholding tax on deemed interest on Heineken's trade payables and on an interest free trade loan from Heineken International contrary to the law. 47. The Appellant contended that the Respondent in its Objection Decision confirmed an assessment deeming interest on the Appellant's liabilities due to the company's foreign related parties and on the trade balances due to related entities.

48. That the Respondent deemed interest on the Appellant's trade payables after erroneously classifying them as loans despite the Appellant informing them that they were not subject to interest. That the Respondent's position was contrary to Section 16(3) of the Income Tax Act which provides that;16 (3)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;"deemed interest" means an amount of interest equal to the average ninety one day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest.

49. That the Tribunal in Socabelec-EA-LTD-v-Commissioner-of-Domestic-Taxes [2020] addressed this issue finding that;“Put another way, taxing interest free loans of this nature on corporations must be supported by legislation. This is the law the Tribunal expected the Respondent to refer to.The definition of "deemed interest" in section 16(3) without more does impose a tax obligation.Until there is legislation that defines loans to include interest free loan, the benefit of such a lacuna must be given to the Appellant."

50. That the Respondent reiterated that trade payables owed by the Appellant to related entities are not subject to interest and as a result and by law they were not considered loans and therefore cannot be subjected to Withholding tax on deemed interest. That the Appellant provided confirmation that the trade payables are not charged interest and the Appellant notes if the same were charged there would be declarations to that effect in the audited accounts.

51. That the Respondent should therefore set aside its Withholding tax assessments on trade payables.

v. Heineken International BV Loan 52. The Appellant stated that the Respondent subjected Withholding tax on deemed interest on the Heineken International BV Loan in line with Section 35(1)(e) of the Income Tax Act. That Section 35(1)(e) provides that;“(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; deducted therefrom tax at the appropriate non-resident rate.”

53. That Section 2 of the Income Tax Act defines deemed interest as;“deemed interest" means an amount of interest equal to the average ninety-one-day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest;”

54. The Appellant submitted that Section 35(1)(e) read together with Section 2 of the Income Tax Act, provides that deemed interest is only applicable to interest free loans received from a non-resident entity and is chargeable to Withholding tax at the appropriate non-resident rate which is provided for in the Third Schedule to the ITA.

55. That the Heineken International BV Loan does not fit the above criteria. That first, it was not an interest free loan. It averred that Heineken provided the Respondent with audited financial statements which specifically indicated that the company was incurring finance costs in respect of the loan. That secondly, the contract for the Heineken International BV Loan provided for the payment of interest on the loan facility.

56. That thirdly Heineken withheld taxes on the interest paid to Heineken International. That it was surprising that on one hand the Respondent is gladly receiving WHT on the interest paid on the loan and on the other hand deeming interest on the loan on the basis that there was no interest on the loan.

57. That in light of this, the Respondent should set aside the Withholding tax assessments on the Heineken International B.V loan.

vi. The Respondent erred in law and fact by confirming its assessment disallowing unrealized foreign exchange loss. 58. The Appellant submitted that Section 4A(1)(ii)(a) of the Income Tax Act provides that:“4A.Income from businesses where foreign exchange loss or gain is realizedi.A foreign exchange gain or loss realized on or after the 1st January, 1989 in a business carried on in Kenya shall be taken into account as a trading receipt or deductible expenses in computing the gains and profits of that business for the year of income in which that gain or loss was realized:Provided that –ii.the foreign exchange loss shall be deferred (and not taken into account)-(a)where the foreign exchange loss is realized by a company with respect to a loan from a person who, alone or together with four or fewer other persons, is in control of that company and the highest amount of all loans by that company outstanding at any time during the year of income is more than three times the sum of the revenue reserves and the issued and paid up capital of all classes of shares of the company;or”

59. That Section 4A (1)(ii)(a) prohibits the deduction of foreign exchange loss realized by a company with respect to a loan from a related party. That in the Socabelec-EA-LTD case trade payables do not constitute loans according to the Income Tax Act. That as a result, the Respondent erred in disallowing foreign exchange losses resulting from trade payables.

60. The Appellant contended that foreign exchange losses of Kshs 16,272,000. 00 that resulted from the revaluation of the inter-company loan as indicated in the reconciliation had been excluded in the amended returns filed by the Heineken and as a result is no longer an issue.

vii. The Respondent’s assessment using banking analysis was erroneous for failing to consider several reconciling items thereby subjecting the Appellant to undue taxation. 61. The Appellant stated that the Respondent in determining the Appellant's tax liability relied on an indirect method of tax assessment called banking analysis. That in using this method, the Respondent reviewed the deposits made in the Appellant’s three (3) (USD, Euro and KES) bank accounts operated at Citi Bank and in the first instance deemed all those deposits to be receipts from the sale of the Appellant's products. That it then compared the value of the deposits vis a vis the income declared in the Income tax returns and the sales figures in VAT returns for the period.

62. That the Respondent then went on to allege that the variance arising from the comparison of the deposits and the income declared in the Income tax returns and the sales figures in VAT returns constituted income that the Appellant had neglected to declare and therefore assessed the variance for CIT and VAT.

63. That in its preliminary responses and in the notice of objection the Appellant protested heavily against the use of banking analysis as unjust and unreasonable for among other things it failed to recognize that some of the deposits that were made to the Appellant's bank accounts were not sales items.

64. That the Respondent then proceeded to adjust its assessment to reflect the following non-sale items on the basis that the Appellant had provided supporting documentation as shown in the table below:i.Inter-company loans of Kshs 279,072,000. 00ii.Capital Injection of Kshs 331,333,200. 00iii.Inter-company transfer of Kshs 854,718,900. 00iv.Unpaid cheques of Kshs 26,787,687. 00KRA Banking AnalysisDetails 2016 2017 2018 2019 2020 Total

Gross Banking 981,761,314 3,316,167,779 1,904,584,595 2,092,801,071 1,212,821,992 9,508,136,751

Inter-company

(279,072,000)

(279,072,000)

loan Capital

(331,333,200)

(331,333,200)

injection

Inter-company (59,678,420) (624,589,263) (138,297,722)

(32,153,496) (854,718,900)

transfer

Unpaid

(15,338,477) (3,482,936) (3,938,281) (4,027,993)

(26,787,687)

cheques

Net Banking

906,744,417 2,077,690,380 1,762,348,593 2,088,773,078 1,180,668,496 8,016,224,964

Withholding

- 1,442,483 7,165,101 19,296,026 4,626,187 32,529,797

taxes

Opening

(76,009,889) (18,283,574) (170,768,650) (444,852,315)

(709,914,428)

debtors

Closing

18,283,574 170,768,650

918,181,696

debtors

444,852,315 284,277,157

Gross

Expected sales 849,018,102 2,231,617,939 2,043,597,359 1,947,493,946 1,185,294,683 8,257,022,029

Net Expected 731,912,157 1,923,808,568 1,761,721,861 1,678,874,091 1,039,732,178 7,136,048,856

sales

Reported

turnover IT2C 614,588,130 918,493,488 1,127,623,012 1,203,453,866 679,990,504 4,544,149,000

Reported

turnover

751,727,097 1,122,077,061 1,260,875,215 1,753,155,330 755,916,291 5,643,750,994

VAT3

Variances

Banking vs 117,324,027 1,005,315,080 634,098,849 475,420,225 359,741,974 2,591,899,855

IT2C

Banking vs (19,814,940) 801,731,507 500,846,647 (74,281,239) 283,815,887 1,492,297,862

VAT3

65. That despite the above adjustments, it was the Appellant’s position that the Respondent omitted to take into account several other non-sale items that it ought to have and some of the adjustments made were undervalued for the purposes of imputing a tax liability on the Appellant. That had the Respondent taken these items into account, there would be no variance as alleged.

66. The Appellant attached to its pleadings a reconciliation capturing what it considered as all the non-sales items that the Respondent ought to have adjusted for during its assessment but failed to do so.

67. The Appellant outlined as below the non-sale items that the Respondent should have adjusted but failed to do so.

a. FX Transfers of KES 2,376,202,420 68. That FX Transfers refers to payments that are moved from one account to another both accounts owned by the Appellant and for different currencies. It averred that in the course of its business, the Appellant received various amounts in the USD, Euro and Kshs accounts. That to meet its day-to-day business needs, it needed to make payments in specific currencies. For example, when it paid staff salaries, it moved monies from its USD account to the Kshs account. When paying foreign suppliers, it moved monies from Kshs account to USD or Euro account.

69. The Appellant averred that whenever these transfers were made, the funds transferred would be deposits in the receiving account. That according to the Respondent, these deposits were to be considered sales and assessed for taxes, which is clearly an error as the amounts are moving within the Appellant's own accounts.

70. It stated that since the transfers do not arise from sales or as revenue for the Appellant, they should have been factored in when adjusting the total bank deposits.

b. Bounced back payments of 28,889,475. 00 71. The Appellant stated that these are payments that it made from its accounts but because of errors such as incorrect account details, wrong currency accounts among others, the payment could not go through. That as a result, the payment was reverted to the Appellant's account.

72. That the Respondent erroneously captured these amounts as deposits from sales and proceeded to assess the same for taxes which was erroneous.

c. Inter-company transfers- additional amount of Kshs 533,900,805. 00 73. The Appellant contended that these were amounts that are received by the Appellant from related parties to cater for costs that are incurred for and on behalf of the related entities. That these amounts were not sales and therefore should not be assessed for taxes.

74. That the Respondent in its assessment had adjusted inter-company transfers of Kshs 854,718,900. 00 only. That this amount was not the complete figure and as a result it failed to capture an additional sum of Kshs 533,900,805. 00 which the Appellant has provided supporting documentation for.

75. That while the Respondent acknowledges that the inter-companies transfers ought to be adjusted, it used the wrong amount. That the additional amount supported by the Appellant should also be adjusted.

d. Difference arising from lower exchange rate for inter-company loan. 76. The Appellant stated that in the assessment, the Respondent adjusted for Kshs 279,072,000. 00 in respect of an inter-company loan of Euro 2,400,000. That however, the foreign exchange rate used by the Respondent was not accurate as a result, the amount captured was lower than it actually was. That as per its workings, the loan amount in Kshs should have been Kshs 280,488,000. 00.

e. Small ticket non-sale items not captured by the Respondent. 77. That in the assessment, the Respondent failed to adjust for the following non-sale items: refund (Kshs 5,853,241), internal transfers (KES 3,249,469), cancelled cheques (Kshs 500,000) and employees refunds (Kshs 205,085).

f. Variance in the loss brought forward. 78. The Appellant stated that in the determination of the CIT tax assessment, the Respondent used inaccurate loss brought forward figures as a result, exposing the Appellant to a higher tax liability. To support this argument the Appellant provided copies of Income tax returns depicting the loss position.

79. To further buttress its argument, the Appellant illustrated with the table below the losses brought forward;Year Loss as per KRA Correct loss position

2016

(409,763,317)

2017 (493,251,937) (409,763,317)

2018 (175,121,119) (657,618,638)

2019 - (935,138,550)

2020 - (1,096,072,488)

g. Tax credits 80. It was the Appellant’s contention that in the assessment workings, the Respondent failed to adjust for accumulated tax credits of Kshs 58,711,359. 00 arising from 2016 withholding tax credits of Kshs 55,079. 00, 2016 corporate installment tax overpayments of Kshs 54,234,009. 00 and 2020 minimum tax paid in error credits of Kshs 4,422,271. 00

h. Exempt VAT sales 81. That in the determination of the VAT tax assessment, the Respondent failed to take into account exempt VAT which had been made by the Appellant and was responsible for part of the variance that the Respondent assessed VAT on.

82. The Appellant submitted that had the Respondent taken into account all the non-sales items that the Appellant had highlighted, there would not be any variance leading to an assessment for tax.

viii. The Respondent erred in law by assessing the Appellant for WHT for the period 2016 up to 7th November 2019 without any legal authority as if it was due and payable by the Appellant. The assessment for WHT is thus illegal, unprocedural and ultra vires 83. The Appellant stated that the Respondent in its Objection decision confirmed an assessment deeming interest on the Appellant's liabilities due to the company's foreign related parties and on the trade balances due to related entities for the period 2016 to 2019.

84. The Appellant submitted that the Respondent had no legal basis for demanding WHT from it as if the same was tax due and payable by the Appellant for the period 2016 to 2019 following deletion of Section 35(6) of the Income Tax Act (“ITA”) through changes introduced by Section 9 of the Finance Act, 2016.

85. That prior to 9th June 2016, Section 35(6) of the ITA authorized the Respondent to collect WHT and attendant penalties from withholders of WHT if the withholder failed to deduct or withhold the WHT as if the WHT was due and payable by the withholders. That the Section provided as follows:“(6)Where a person who is required under this section, in accordance with the rules made under section 130, to deduct tax-a.fails to make the deduction or fails to deduct the whole amount of the tax which he should have deducted; orb.fails to remit the amount of a deduction to the Commissioner on or before the twentieth day following the month i which the deduction was made or ought to have been made; the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and the provisions of this Act relating to the collection and recovery of tax and the payment of interest thereon, shall apply to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by that person and the due date for the payment of which was the date on which the amount of tax should have been remitted to the Commissioner.”

86. The Appellant submitted that the import of the deleted Section 35(6) of the ITA was that in cases where a person failed to make a deduction or deducted only part of what he was required to deduct, the whole amount of what should have been deducted and remitted were recoverable from the person who had failed to deduct as if it was tax due from him. That consequently, during the pendency of this Section, any amount of WHT that a person might have failed to collect would have been recoverable from that person as if it was tax due from him.

87. It averred that the above provision was deleted by the Finance Act, 2016, with effect from 9th June 2016. That it was not until 9th November 2019 that the provisions of the deleted Section were reintroduced albeit in the TPA as Section 39A. That accordingly, with respect to any deducted WHT, the Commissioner had no legal mandate to recover unpaid WHT from withholders for the period until the reintroduction of the provision in the TPA.

88. That this position was affirmed by the High Court in Commissioner of Domestic Taxes v Pevans East Africa Limited & 6 others (Tax Appeal E003 of 2019) [2022] KEHC 10392 where the Judge determined that:“I am in agreement with the Tribunal that prior to 2016, section 35(6) of the ITA provided that the commissioner could claim taxes from a payer who fails to make a deduction as though the taxes were due from them. However, the amendment introduced by the Finance Act, 2016 deleted the said section 35(6) of the ITA meaning that the Commissioner could no longer demand taxes not withheld from the person who should have withheld the same and that this position remained until the enactment of the Finance Act, 2019 came into force on November 7, 2019 when the previously deleted provisions of Section 35(6) of the ITA were now reintroduced and reproduced as a new section 39A under the TPA.Consequently, I therefore find and hold that during the subject years of 2018 and 2019, the Commissioner could not collect the WHT that ought to have been deducted by the Respondents from the punters and that all the Commissioner could do was seek the same from the punters directly.”

89. The Appellant submitted that for the period 9th June 2016 to 7th November 2019, the Commissioner could not collect the WHT from the Appellant as an alleged withholder. That consequently, the Respondent cannot demand Withholding tax from the Appellant for the said period, as if it was a tax due from the Appellant as this had no legal basis. That by confirming the assessment for WHT, the Respondent had allocated itself powers that it did not have. That the Respondent's decision to confirm the assessment cannot be salvaged or brought back into the realm of legality.

Appellant’s Prayers 90. The Appellant prayed for the following Orders:-a.The Appeal be allowed.b.The Respondent’s Objection decision dated 23rd December, 2022 be vacated and set aside in its entirety.b.Any other orders that the Tribunal may deem fit.

Respondents Case 91. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated 9th March 2023 and filed on 10th March 2023 together with the documents attached thereto.ii.The Respondent’s Supplementary Statement of Facts dated 23rd October 2023 and filed on 25th October 2023. iii.The Respondent’s written submissions dated 18th December 2023 and filed on 19th December, 2023.

92. The Respondent stated that vide a letter dated 13th September 2021 it issued a notice of tax investigation to the Appellant and began tax investigations into the business of the Appellant following non-remittance of tax by the Appellant.

93. That it requested the Appellant to provide copies of financial statements, general ledgers as well as list of its trade receivable and payables for the period 2016 to 2020. That the Appellant forwarded the accounts payable and accounts receivables for the years 2016 to 2020.

94. That upon review of the documents provided by the Appellant, the Respondent shared its finding with the Appellant vide a tax investigation findings letter dated 22nd October 2021 indicating that the additional taxes of Ksh. 1,316,937,856. 00 were due and payable by the Appellant.

95. That in response to the tax investigations findings letter, the Appellant provided a cogent response vide a letter dated 14th December 2021 highlighting the various defects in the findings arrived at by the Respondent. It averred that the Appellant's arguments included the fact that the Respondent had issued findings on the basis of assumptions that were not sound in law and provided the reconciliation showing the correct tax position.

96. That a meeting between the Appellant and the Respondent was held on 23rd August 2022 to review the documents provided by the Appellant and hear explanations provided. That some of the issues raised in the audit findings were resolved and set aside. That the Respondent further requested additional information to enable it close out on pending assessments.

97. That the Appellant provided the information requested by the Respondent via emails dated 30th August 2022, 6th August 2022 and 22nd September 2022.

98. That consequent to the Respondent reviewing the information provided by the Appellant and the meeting held, it issued a notice of assessment dated 28th September 2022 in relation to Customs tax, Corporate tax, VAT and Withholding tax amounting to Kshs. 2,147,034,458. 00.

99. That the Appellant objected to the entire assessment vide a notice of objection dated 28th October 2022. That subsequently it issued an objection decision on 25th November 2022 confirming the assessments for Corporate income tax amounting to Ksh 197,260,962. 00, WHT amounting to Kshs 245,637,030. 00, and VAT amounting to Ksh 59,362,867. 00.

100. The Respondent submitted that it can investigate and issue assessments beyond the 5 years mark in cases where there is gross or wilful neglect, evasion or fraud by the Appellant.

101. That notably, the investigations by the Respondent indicated that there were issues of wilful neglect and tax evasion on the part of the Appellant warranting the Respondent to raise the additional assessments.

102. That the issue of fraud is also evident as the Appellant omitted taxable income in its return as per Section 97(a) of the Tax Procedures Act 2015.

103. The Respondent averred that the Appellant committed an offence stipulated in Section 95 of the Tax Procedures Act 2015 by failing to pay the correct tax.

104. That the Respondent raised the additional assessments in accordance with Section 29(1)and (2) of the Tax Procedures Act 2015.

105. It was the Respondent’s contention that it is empowered by Section 31 of the Tax Procedures Act 2015 to use the best judgment in raising additional assessments.

106. To support its case, it cited the case of Wilken Telecommunication Limitedvs Commissioner of Domestic Taxes TAT no. 195 of 2021 and stated that the Tribunal pronounced itself on the issue of best judgment by quoting what was stated by Woolf J in Van BoeckeI v C&E QB Dec 1980 [1981] STC290.

107. The Respondent stated that in raising the additional assessment it considered the materials presented by the Appellant. That this was evident on the fact that the Respondent requested the Appellant to provide copies of financial statements, general ledgers as well as list of trade receivable and payables for the period 2016 to 2020.

108. The Respondent submitted that it considered all the documentation provided by the Appellant and were not only limited to the banking analysis as the Appellant purports.

109. The Respondent asserted that it acted fairly, reasonably and with a basis in raising the additional assessments of Kshs. 502,260,859. 00 principal tax together with the resultant interest and penalties.

110. It urged the Tribunal to uphold the additional assessments issued by the Respondent as the same were based on the documentation provided by the Appellant and the best judgment of the Respondent which was in accordance with the law.

111. The Respondent submitted that during the initial engagement between the Appellant and the Respondent, non-income items were extensively deliberated upon and adjustments made accordingly.

112. It asserted that the supporting documents provided by the Appellant in support of the objection were reviewed and contentions and information therein were taken into consideration in establishing the correct tax liability. That as such, no further adjustments were made.

113. That notwithstanding the opportunity granted to the Appellant to address the issues by either providing withholding payment evidence or the credit terms with the parties, the Appellant advertently failed to provide the requested information as per its letter dated 23rd August 2022. That in the absence of this the taxes were payable as per the statute.

114. The Respondent reiterated that its actions in raising additional assessments amounting to Kshs. 502,260,859. 00 being the principal tax was within the law.

115. The Respondent stated that it relied on the following provisions of the law;i.Section 97 of the Tax Procedures Act 2015. ii.Section 95 of the Tax Procedures Act 2015. iii.Section 29 of the tax Procedures Act 2015. iv.Section 31 of the Tax procedures Act 2015.

Respondent’s Prayers 116. The Respondent prayed that the Tribunal finds:i.That this Appeal be dismissed with costs to the Respondent as the same is devoid of merit.ii.That the objection decision dated 23rd December 2022 be upheld and the taxes be deemed due and collectable.

Issues for Determination 117. The Tribunal upon consideration of the pleadings and written submissions separately filed by the parties together with the evidence adduced on the part of the Appellant frames the issues for determination to be:-i.Whether the Respondent was justified in assessing the Appellant beyond five years.ii.Whether the Respondent erred in its assessment for Withholding tax.iii.Whether the Respondent was justified in confirming the assessment for Income tax and VAT based on banking analysis method.

Analysis and Findings 118. The Tribunal having appropriately ascertained the issues that fall for its determination shall proceed to analyze the same separately as hereunder.

i. Whether the Respondent was justified in assessing the Appellant beyond five years. 119. It was the Appellant’s contention that the Respondent erred in law and acted ultra vires by issuing an assessment in respect of the year 2016 contrary to statutory provisions providing for a statutory time line within which assessments should be issued-five years.

120. That the Respondent is mandated to impose and collect taxes only in accordance with the Constitution and Legislation. That the law prescribes that the Respondent is only legally allowed to make amendments to the Appellant's tax assessment and demand taxes within a period of five years as provided for at Section 23 (1)(c) and 31(4)(a)(b) of the Tax Procedures Act.

121. It averred that in the assessment issued in 2022, the Respondent is only entitled to issue amended assessments for the years 2017 onwards. That any assessment issued for years prior to 2017 would by dint of Section 31(4)(b), be deemed outside statutory timelines hence an action that is ultra vires.

122. The Respondent on its part averred that it can investigate and issue assessments beyond the 5 years in cases where there is gross or wilful neglect, evasion or fraud by the Appellant.

123. That notably, the investigations by the Respondent indicated that there were issues of wilful neglect and tax evasion on the part of the Appellant warranting the Respondent to raise the additional assessments.

124. That the issue of fraud is also evident as the Appellant omitted taxable income in its return as per Section 97(a) of the Tax Procedures Act 2015.

125. Section 29(5) of the TPA provides as follows regarding time limits in relation to assessments;“Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.”

126. It was not in dispute that the Respondent issued its assessment on 28th September 2022. The assessment related to income tax for the years of income 2018 to 2020, the VAT liability for the years 2017 to 2019 and for Withholding tax arising for the years 2016 to 2019. It follows therefore that as provided under Section 29(5) of the TPA the Respondent was limited to issue tax assessments for the period running from the year 2017 except as provided for under Section 31(4) of the TPA. The tax assessments relating to Withholding tax assessment for the year 2016 thus offends the foregoing statutory edict.

127. Section 31(4) of the TPA provides as follows regarding cases where the Respondent may issue assessments beyond 5 years;“The Commissioner may amend an assessment—a.in the case of gross or wilful neglect, evasion, or fraud by, oron behalf of, the taxpayer, at any time; orb.in any other case, within five years of—i.for a self-assessment, the date that the self-assessment taxpayersubmitted the self-assessment return to which the self-assessment relates; orii.for any other assessment, the date the Commissioner notified the taxpayer of the assessment”(Emphasis added)

128. The Tribunal noted that although the Respondent had alleged that the Appellant had committed an offence under Sections 95 (Failure to pay tax) and 97 (Fraud in relation to tax) of the TPA, nothing was placed before the Tribunal to demonstrate that any steps had been taken to prosecute anyone in regards to any offence committed. The Tribunal therefore holds the view that since these are illegal activities whereby an entity or an individual knowingly obtains a tax benefit illegally, it ought to be specifically pleaded. This position was pointed out in National Social Security Fund Board of Trustees v Commissioner of Domestic Taxes, Kenya Revenue Authority [2016] eKLR; where the court stated as follows;“…there is a world of difference between an assertion and proof.That which a party states to be his case is an assertion. The party needs to adduce evidence to support his said assertion, with a view to proving his case.”

129. Based on the foregoing the Tribunal therefore finds that the Respondent could not use the two Sections of TPA as grounds for assessing taxes beyond the prescribed period of five years because the Respondent did not prove either fraud or evasion in this case.

130. Consequently, the Tribunal finds that the Respondent was not justified in assessing any tax beyond the the five year limit.

iii. Whether the Respondent erred in its assessment for Withholding Tax. 131. It was the Appellant’s contention that the Respondent erred in law by assessing the Appellant for WHT for the period 2016 up to 7th November 2019 without any legal authority as if it was due and payable by the Appellant.

132. The Appellant submitted that the Respondent had no legal basis for demanding WHT from it as if the same was tax due and payable by the Appellant for the period 2016 to 2019 following deletion of Section 35(6) of the Income Tax Act (“ITA”) through changes introduced by Section 9 of the Finance Act, 2016.

133. The confirmed assessment for WHT in this dispute relates to the period 2016 to 2019.

134. The Tribunal has noted that prior to 2016, Section 35(6) of the ITA provided that the Commissioner could claim taxes from a taxpayer who fails to make a deduction as though the taxes were due from them.

135. However, the amendment introduced by the Finance Act, 2016 deleted the said Section 35(6) of the ITA meaning that the Commissioner could no longer demand taxes not withheld from the person who should have withheld the same. This position remained until the enactment of the Finance Act, 2019 which came into force on 7th November 2019 when the previously deleted provisions of Section 35(6) of the ITA were reintroduced and reproduced as a new Section 39A under the TPA.

136. Section 39A of the TPA provides as follows regarding WHT:“39A.Penalty for failure to deduct or withhold taxWhere a person who is required under a tax law to deduct or withholdtax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax, and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the due date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner.”

137. Section 39A of the TPA provides that everyone who is required to withhold and remit tax must do so, failure to which it would be liable to pay for the tax that it failed to withhold as if it was a tax that is due and payable by it. Section 39A of the TPA was however only applicable from 7th November 2019 when it came into force.

138. The Respondent could therefore not demand for WHT from the Appellant in the period between January 2016 to 7th November 2019 when the law which allowed the Commissioner to demand taxes not withheld from the person who should have withheld the same had been deleted.

139. This position was affirmed in Commissioner of Domestic Taxes v Pevans East Africa Limited & 6 others (Tax Appeal E003 of 2019) [2022] KEHC 10392 (KLR) (Commercial and Tax) (13 May 2022) (Judgment) where the Court stated as thus:“Consequently, I therefore find and hold that during the subject years of 2018 and 2019, the Commissioner could not collect the WHT that ought to have been deducted by the Respondents from the punters and that all the Commissioner could do was seek the same from the punters directly.”

140. For the reasons set out above, the Tribunal finds that the Respondent erred in assessing WHT for the period between January 2016 to 7th November 2019 when the Appellant could not be held liable for WHT.

141. The Tribunal however noted that the WHT for 2019 were lumped together and therefore it was not possible to determine whether there were some amounts that were assessed subsequent to 7th November 2019.

142. The Tribunal shall now proceed to determine whether WHT that could have been assessed after 7th November 2019 is payable.

143. The Appellant stated that the Respondent erred in law and fact by demanding Withholding tax on deemed interest on Heineken's trade payables and on an interest free trade loan from Heineken International contrary to the law.

144The Appellant contended that the Respondent in its Objection decision confirmed an assessment deeming interest on the Appellant's liabilities due to the company's foreign related parties and on the trade balances due to related entities.

145. That the Respondent deemed interest on the Appellant's trade payables after erroneously classifying them as loans despite the Appellant informing it that they were not subject to interest. That the Respondent's position was contrary to Section 16(3) of the Income Tax Act

146. The Respondent on its part stated that notwithstanding the opportunity granted to the Appellant to address the issues by either providing withholding payment evidence or the credit terms with the parties, the Appellant advertently failed to provide the requested information as per its letter dated 23rd August 2022. That in the absence of this the taxes were payable as per the statute.

147. Section 16(3) of the Income Tax Act defines loan 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;…”

148. The dispute here relates to deemed interest assessed by the Respondent regarding advances in form of trade payables and the loan advanced by related party Heineken International BV which the Respondent has sought to levy withholding tax on.

149. Section 2 of the Income Tax Act defines deemed interest as follows;“deemed interest” means an amount of interest equal to the average ninety-one day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest;”

150. From the above definition it follows that deemed interest is only applicable where a loan (as defined in Section 16(3) of the Income Tax Act) is interest free.

151. The Tribunal perused through the documents presented by the Appellant in support of this Appeal and noted that the Appellant provided an Agreement dated 30th January 2017 in relation to a loan advanced by its related party amounting to EUR 2,400,000.

152. In the loan Agreement, the Tribunal noted that at Clause 3 it provides for interest to be paid on the loan. Clause 3 of the Agreement states as follows;“Drawings bear the interest rate of the desired interest period (3, 6 or 12 months), which interest rate is based on the EUR/BOR or its successor as determined by lender (as presented on Bloomberg 2 business days before the first day of such interest period) (the “Base”) plus a margin of 1. 85 basis points (1. 85%). In the event that the Base Rate for the interest period is lower than zero, then the Base Rate will be set at zero for such period. The interest is payable at the end of the relevant period. The amount of the interest shall be calculated on the basis of the actual days elapsed and a year of 360 days. Within five business days of the start of an interest period. Lender shall provide Borrower with written notice of the interest rate that is applicable to the relevant interest period."

153. From the foregoing provision in Clause 3 of the Agreement between the Appellant and its related party, the loan was not interest free and therefore not subject to deemed interest

154. Regarding trade payables, nothing was placed before the Tribunal by the Appellant to demonstrate that the trade payables advanced by the related company were interest free or demonstrate the actual terms of its engagement with the related parties regarding the trade advances.

155. It is the Tribunal’s position that the Appellant upon being served with the assessment was enjoined to provide the necessary documents and information that suggest that such assessment was erroneous, misplaced and not justifiable in the circumstances. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act squarely place the burden of proof upon a taxpayer to discredit any tax assessment or decision.

156. Section 56(1) of the Tax Procedures Act reads as follows:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

157. Further, Section 30 of the Tax Appeals Tribunal Act provides as follows:-“In any 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.”

158. The Tribunal is further persuaded by the finding in Nicholson v Morris 51TC95 where it was held that:“Even supposing that I were myself to think that the amounts were wrong – and, as I have freely conceded, and as [Counsel for the Revenue] has freely conceded, they probably are wrong – what on earth could I or anybody else at this stage, in the total absence of evidence, substitute for them? The answer is that it is a complete and utter impossibility; and that is why, of course, the Taxes Management Act throws upon the taxpayer the onus of showing that the assessments are wrong. It is the taxpayer who knows and the taxpayer who is in a position (or, if not in a position, who certainly should be in a position) to provide the right answer, and chapter and verse for the right answer, and it is idle for any taxpayer to say to the Revenue, “Hidden somewhere in your vaults are the right answers: go thou and dig them out of the vaults.” That is not a duty on the Revenue. If it were, it would be a very onerous, very costly and very expensive operation, the costs of which would of course fall entirely on the taxpayers as a body. It is the duty of every individual taxpayer to make his own return and, if challenged, to support the return he has made, or, if that return cannot be supported, to come completely clean, and if he gives no evidence whatsoever he cannot be surprised if he is finally lumbered with more than he has in fact received. It is his own fault that he is so lumbered.”

159. Additionally, the Tribunal reiterates its position in the case of Boleyn International Ltd Vs Commissioner of Investigations and Enforcement, Nairobi TAT Appeal no.55 of 2018 where it held that:-“We find that the Appellant’s at all times bore the burden of proving that the Respondent’s decisions and investigations were wrong. The tribunal is guided by the provisions of Section 56(1) of the TPA, 2015 which states: “In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

160. Based on the analysis of the provisions of the law and the case laws, the Tribunal finds that the Respondent did not err in its assessment for WHT on trade payables advances after 7th November 2019 when the Appellant was required by law to withhold.

iii. Whether the Respondent was justified in the use of banking analysis method in assessing the VAT and Income Tax on the Appellant. 161. The Appellant stated that the Respondent in determining its tax liability relied on an indirect method of tax assessment called banking analysis. That in using this method, the Respondent reviewed the deposits made in the Appellant’s three (3) (USD, Euro and KES) bank accounts operated at Citi Bank and in the first instance deemed all those deposits to be receipts from the sale of the Appellant's products. That it then compared the value of the deposits vis a vis the income declared in the Income tax returns and the sales figures in VAT returns for the period.

162. That the Respondent then went on to allege that the variance arising from the comparison of the deposits and the income declared in the Income tax returns and the sales figures in VAT returns constituted income that the Appellant had neglected to declare and therefore assessed the variance for CIT and VAT.

163. The Respondent on the other hand stated that in raising the additional assessment it considered the materials presented by the Appellant. That this was evident on the fact that the Respondent requested the Appellant to provide copies of financial statements, general ledgers as well as list of trade receivable and payables for the period 2016 to 2020.

164. That the Appellant forwarded the accounts payables and accounts receivables for the years 2016 to 2020. The Respondent submitted that it considered all the documentation provided by the Appellant and were not only limited to the banking analysis as the Appellant purports.

165. That during the initial engagement between the Appellant and the Respondent, non-income items were extensively deliberated upon and adjustments made accordingly.

166. The Tribunal has perused through the documents presented and notes that in the assessment letter dated 28th September 2022, the basis of the assessment for both Income tax and VAT was the variances arising from the difference between the expected sales as per the bankings and reported sales as per IT2C for income tax and sales as per VAT3 for VAT respectively. It was therefore evident that the basis for the assessments for Income tax and VAT by the Respondent was the banking analysis.

167. The Tribunal further notes that during the assessment and objection process the Appellant was requested for various documents which the Appellant provided. The Appellant in its Statement of Facts has further enumerated non-sales items which it averred that it provided supporting documentation but the Respondent omitted or undervalued while assessing the tax.

168. The Appellant further provided the reconciliations to illustrate these non-sale items which include; FX Transfers of Kshs 2,376,202,420. 00, bounced back payments of Kshs 28,889,475. 00, Inter-company transfers of Kshs 533,900,805. 00, difference arising from lower exchange rate for inter-company loan, small ticket non-sale items not captured, variance in the loss brought forward, accumulated tax credits and exempt sales.

169. The Tribunal notes that the banking analysis method of assessment of income for tax purposes, as established in the United States Case of Gleckman v. United States (80 F. 2d 394 - Circuit Court of Appeals, 8th Circuit 1935); as cited by Wondiye Birhanu in his article “Bank deposit method of proving Tax Evasion: the current litigation heresies” where the requirements were summarized as follows:“As understood from Gleckman case, for the government to bring a charge based on bank deposit method of proof, government must fulfil the following yardsticks:i.The taxpayer was engaged in a business or income-producing activity from which the investigation auditor/ court can infer that the unreported income arose;ii.Periodic and regular deposits of funds were made into accounts in the taxpayer’s name or over which the taxpayer had dominion and control.iii.An adequate and full investigation of those accounts was made in order to distinguish between income and non-income deposits;iv.Unidentified deposits have the inherent appearance of income, e.g., the size of the deposits, odd or even amounts, fluctuations in amounts corresponding to seasonal fluctuations of the business involved, source of checks deposited, dates of deposits, accounts into which deposited, etc.”

170. The Tribunal further reiterates the finding in the case of Holland V United States, 348 U.S. 121, 130-132 (1954), Parks v. Commissioner, 94 T.C 654, 658 (1990); Estate of Mason v. Commissioner, 64 T.C . 651, 656 (1975), affd. 566 F. 2d 2 (6th Cir. 1977), where the court held that:-“If a taxpayer does not maintain adequate books and records, the Commissioner may reconstruct the taxpayer’s income by any reasonable method which clearly reflects income including the bank deposit method”

171. Although the Appellant demonstrated that it had provided documents that were requested for by the Respondent and further provided analysis of the non-income items in its bank statements, the Respondent in its Statement of Facts did not address these specific issues raised by the Appellant. Further the Tribunal notes that the Respondent at no time raised any issue regarding failure by the Appellant to provide documents that it requested for in relation to Income tax and VAT or as specified in both Income Tax Act or VAT Act in support of the objection.

172. Further, although the Respondent is empowered under Section 31 of the Tax Procedures Act to amend a taxpayer’s assessment, it ought to demonstrate that it exercised best judgment to ensure that the taxpayer is liable for the correct amount of tax. The question before this Tribunal is therefore whether the Respondent’s assessment was a product of best judgment.

173. In the instant case, the Respondent solely relied on the Appellant’s bank statements to determine the income of the Appellant despite the fact that the Appellant had at all times provided any document the Respondent had requested from it. The Tribunal notes that at no time during the objection process or at this Appeal has the Respondent alluded to the Appellant failing to provide any document that it requested for.

174. It follows therefore that the Respondent had sufficient documents from the Appellant that would have enabled it determine the sales and income of the Appellant.

175. The Tribunal further reiterates its position as was held in Afya X Ray CenterLimited v. Commissioner of Domestic Taxes (TAT Appeal No. 70 of 2017 ) where it stated:-“… the Tribunal is concerned with the status, or better yet, the validity of an assessment that has relied only on bank statements. It is common knowledge that every deposit in an account is not necessarily income to the account owner. …”

176. As it stands, the Respondent’s confirmed assessment could result in it collecting more than is due from the Appellant, which is an outcome the Tribunal does not wish to perpetuate.

177. It was the view of the Tribunal that once the taxpayer provides all the documents the Respondent had requested for in relation to the Income tax and the VAT, the Respondent had the obligation to determine the tax liability of the Appellant based on the documents or ask for additional documents if not satisfied.

178. From the foregoing analysis, the Tribunal finds that the Respondent was not justified in confirming the assessments for Income tax and VAT based on bank analysis method.

Final Decision 179. The Tribunal on the basis of the foregoing analysis finds that the Appeal is partially merited and accordingly proceeds to make the following final Orders:i.The Appeal be and is hereby partially allowed.ii.The Respondent’s Objection decision dated 23rd December, 2022 be and is hereby varied in the following terms;a.The Respondent’s confirmed tax assessment for Withholding tax in relation to the year 2016 be and is hereby set aside.b.The Respondent’s confirmed assessment for VAT and Income tax be and is hereby set aside.c.The Respondent’s assessment for WHT on trade payables subsequent to 7th November 2019 is hereby upheld.d.The Respondents is hereby directed to issue a fresh WHT assessment on trade payables covering the period after 7th November 2019 within 30 days of the date of delivery of this Judgment.iii.Each party to bear its own costs.

180. It is so ordered.

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