[2024] KETAT 154 (KLR)

James Finlay (Kenya) Limited v Commissioner Legal Services & Board Coordination (Tax Appeal 1296 of 2022) [2024] KETAT 154 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 154 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1296 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich, E Ng'ang'a & B Gitari, Members

February 9, 2024

Between

James Finlay (Kenya) Limited

Appellant

and

Commissioner Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a branch of James Finlay (Kenya) Ltd, a company incorporated in the United Kingdom (UK), with its immediate holding company being James Finlay Ltd (JFL-UK), a company incorporated in UK, whose principle activity is in tea growing, manufacture and value addition as well as flower growing for sale as cut stems.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued a notice of partial assessment to the Appellant on 29th June, 2021 for the period 2016 wherein the Respondent disallowed management fee charge incurred by the Appellant amounting to Kshs 81,905,760. 00 and assessed for Corporate income tax amounting to Kshs 52,522,069. 00, being principal tax of Kshs 30,714,660. 00 plus penalties and interest of Kshs 21,807,409. 00.

4. The Appellant vide a letter dated 28th July 2022 lodged a notice of objection against the assessments. The Respondent requested for additional information via email on 4th August 2022. The Appellant replied vide a letter dated 8th August 2022.

5. The Respondent issued its objection decision vide a letter dated 21st September 2022 confirming the assessments.

6. Being aggrieved by the Respondent’s objection decision, the Appellant filed a Notice of Appeal on 19th October 2022.

The Appeal 7. The Appellant in its Memorandum of Appeal cited the following grounds for Appeal:i.That the Respondent erred in law and fact by alleging that there was no documentary evidence that management support services were provided.ii.That the Respondent erred in law and fact by alleging that JFL did not have employees and could therefore not have capability to provide management support services to the Appellant.iii.That the Respondent erred in fact and law by alleging that the financial statements did not demonstrate that service was rendered to the Appellant.iv.That the Respondent erred in fact and law by alleging and that there was no proof of payment of management fees to JFL of Ksh 81,905,760. 00 by the Appellant.v.That the Respondent erred in fact and law by alleging that where management support services were provided, the services duplicated functions being performed by the Appellant's in-house employees.vi.That the Respondent erred in fact and law by alleging, without prejudice, that the tax loss for 2016 year of income of Ksh 91,021,433. 00 per filed CIT return for 2016 year of income cannot be utilized when arriving at the taxable income/loss for 2016 year of income.vii.That the Respondent erred in law and fact by alleging that the CIT overpayments Ksh 8,804,554. 00 per filed CIT return for 2016 year of income and WHT paid of Ksh 10,187,160. 00 are not available for offset against additional CIT liability for 2016 year of income as determined by the Respondent.viii.That the Respondent erred in law and fact by demanding for additional CIT of Ksh 52,522,069. 00 consisting of principal tax of Ksh 30,714,660 and penalties and interest of Ksh 21,807,409. 00

Appellant’s Case 8. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts filed on 2nd November, 2022 together with the documents attached thereto.b.Witness statement of Alice Muriithi dated and filed on 12th April, 2023 that was admitted in evidence on oath on 28th September 2023. c.The Appellant’s written submissions dated 31st October 2023 and filed on 1st November, 2023.

9. The Appellant stated that JFL-UK is the holding company of the Appellant and is incorporated in the UK. That the James Finlay’s group ("the group") has been in existence since 1750 and is a world-renowned tea and coffee grower. That the group has presence through various subsidiaries and branches across four continents. It averred that given its vast experience in tea and coffee growing, the group has placed centralized expertise in certain companies one of which is JFL. That this is a common feature of multinational enterprises that centralize expertise to deploy that expertise in an effective and cost-efficient manner. That this feature of multinationals has been recognized in the OECD Transfer Pricing Guidelines 2022, Paragraph 7. 2.

10. That JFL-UK as the service provider for the Appellant and other James Finlay group operations across the world provided management support services to the Appellant in 2016 year of income of the following nature:i.The Group Finance Director support. This involved:a.Technical support in reviewing complex tax mattersb.Tax audit supportc.Training on accounting developmentsd.Capital investment appraisal and monitoring post transactione.Accounting advice and guidancef.Internal audit support through supervision of local teamsg.Review of audit reports and providing recommendationsh.Supporting on special projectsi.Budget reviewj.Organizing for internal loan facilities from the cash poolk.Setting weekly foreign exchange hedging targets and approving hedging transactionsii.Global Human Resources Director support as follows:a.Took part in the recruitment of key executivesb.Provided support on implementation of structural changesc.Offered support in performance reviews and managementd.Managed pay review and bonus schemese.Provided oversight and guidance on career development framework.f.Launched employee engagement strategiesg.Staff recruitment and training programs are also facilitated from JFL. 'Finlays Academy' which is coordinated from JFL, contains various online training modules which are accessed by the employees of the Appellantiii.Group Technical Director support as follows:a.Overseeing the certification of old equipmentb.Overseeing machine maintenancec.Ensuring that safety standards were set and adhered tod.Ensuring that the manufacturing standards are improved and championed innovation strategiesiv.Technology (IT) Support Services as follows:a.Formulated and monitored IT strategy and controlsb.Supported implementation of new IT projects and certification of equipmentc.JFL provided the Appellant with various software which include:- Salesforce which is used for training the Appellant's staff from the UK remotely

Mimecast which is a gateway for filtering emails

Cynet Managed System which is a centralized software to protect the network and monitors computer activities within the group

SIEMS which is a centralized management system for network protection 。

Sharepoint which was developed by JFL and that is used by the

Appellant to share information across departments/externally in a secure manner. The tool provides a platform for collaboration across the organization

Rally which provides access to all sales information for the group and Appellant

Azure &am for back up support

Accolade, a portfolio management softwared.Support is provided by JFL since they are the ones with the know-how of the IT system. JFL also customizes user policies to assist the Appellant's employees in deploying the systems.v.Group Head of Safety which involved:1. Development of the Group safety strategies and standards2. Visiting the Appellant to audit and support in documenting the group safety strategy and provide an improvement report with recommendations3. Collaborating with the Appellant to benchmark and standardize good practices from other countries4. The Group Head of Safety and holds monthly meetings with the Appellant's relevant staff to review safety standards.vi.Sustainability Support which involved:a.Overseeing implementation of Group's sustainability standardsb.Liaising with fair trade bodies such as the Fairtrade Organisation and Rainforest Alliance on behalf of the Appellant and collating and producing annual sustainability report which were circulated to major customers, suppliers, and stakeholdersc.The Appellant has the following certifications, Rainforest Alliance, Fairtrade Producer, Fairtrade Processor, FSSC 22000-Food Safety and Systems Certification Organic processor, Kosher, Halaal and ISO9001 which JFL provided support to the Appellant in obtaining compliance to the certificationsd.The Rain Forest Alliance Certification is a requirement for all James Finlays entities. JFL held consultative meetings on behalf of the Appellant with the standard owners like the Rain Forest Alliance and Fair Trade to review the standards and to potentially add new standards. This helped the Appellant to win accreditations and pass sustainability audits.e.The audits are instrumental in winning new business and retaining existing business. Many customers, especially large retailers, will delist suppliers if there were unacceptable non-conformances resulting from the audits while some retailers will only use suppliers accredited by Fair Trade Organization

11. That the management support services provided to the Appellant during 2016 year of income were rendered through JFL employees. A list of these employees is captured below:S/No Position Last Name 1 First Name NINumbef Hire Dat Term Da1- Document PrOVIDED

1 Group Head of Internal AudiT Carr David NRxxxx8B 05/03/2014 31/07/2016 Employment contract

2 Group HR Manager Corran David JPxxxx1D 22/06/2015 04/01/2019 Employment contract

3 Director of Risk And Compliance Davies Julian NZxxxx7C 01/12/2014 31/01/2019 Email exchange.

4 HR Administrator Dodge Lorraine JLxxxx1D 15/12/2014 30/09/2022 Employment contract

5 Market Insight Analyst Edwards Sian JMxxxx5D 23/05/2016

Employment contract

6 Internal Audit Manager Fennell Finola SJxxxx5D 28/09/2015 31/07/2016

7 Company Secretary Gilmour Duncan YZxxxx1C 18/06/1973 30/04/2019 Bonus payment letter

8 Office Manager Halse Michaela NHxxxx2B 10/03/2008

Employment contract

9 Finance Manager Hill Gavin JTxxxx9D 01/02/2016

Employment contract

10 Head of Corporate Communications Kahrl Ashleigh NZxxxx2C 15/03/2010 12/02/2016 Employment contract

11 Group Head of Health & Safety Keating Mike YYxxxxX3B 07/11/2016

Employment contract

12 Non Executive Director Kuehne Christiane

17/12/2015

13 Sustainability Officer Millar Jo PXxxxx5B 20/08/2013 29/11/2019 Employment contract, bonus letter &JD

14 Internal Audit Manager PAlfreyman John JG9xxxxD 20/04/2009 31/07/2016

15 Group Head of Sustainability Pennant- Jones Michael NWxxxx1A 03/05/2005 23/11/2018 Offer letter

16 Human Resources Director Perkins Anthony NBxxxx9A 30/07/2007 11/03/2016 Employment contract

17 Internal Auditor Pindai Delyn SExxxx2A 25/11/2013 31/07/2016 Employment contract

18 Group Finance Director Rutherford Julian NWxxxx5A 14/01/2013

Bonus payment letter

19 Non Executive Director Strathdee Stuart BTxxxx7C 01/03/2000

Eonus payment letter

20 Group Management Accountant Ung Sabine SExxxx6C 01/08/2007

21 Group Financial Controller Whittaker John NMxxxx4A 09/06/2008

Employment contract

12. That a current review of JFL's website contains names of some of the Global Executive Team members who were in JFL's employment as at 2016 year of income.

13. The Appellant gave an example of Mr Julian Ruthertord who is the Group Finance Director of James Finlay Limited ('Finlays'). That Julian joined Finlays as Group Finance Director in January 2013. That since joining Finlays he had led the acquisitions of both Autocrat (2014) and Casa Fuentes (2014) and the disposal of the Horticulture businesses (2015). That prior to joining Finlays he qualified as a Chartered Accountant with PwC before joining Associated British Foods PLC where he worked for 16 years for a variety of food businesses and in several finance roles.

14. The Appellant's averred that the overall tax position per the filed original Corporate Income Tax (“CIT") return for 2016 year of income shows that the Appellant was in a tax loss position of Ksh 91,021,433. 00 and had tax overpayment of Ksh 10,402,927. 00 as captured in the table below:Description Amount(KES)

Tax loss for the year per filed CIT return (91,021,433)

Less taxes paid:

Withholding tax (7,633,444)

Advance Tax (1,171,110)

Tax credit brought forward from 2015 year of income (1,598,373)

Total tax overpayment (10,402,927)

15. It posited that when making management fees payment for the services and support received from JFL, the Appellant withheld taxes on gross amount of Ksh 81,497,280. 00 (slight difference from Ksh 81,905,760,00 since the exchange rate used when remitting withholding tax (WHT) was Kshs 146 to 1 GBP) to JFL at the rate of 12. 5% and remitted WHT to the Respondent of Ksh 10,187,160. 00 per WHT reference KRAWHTLTO4317722016.

16. The Appellant submitted that the standard of Transfer Pricing ("TP") documentation that a taxpayer is required to provide is stipulated in Rule 9 of the Income Tax (Transfer Pricing) Rules, 2006 (“Kenyan TP Rules"). That this Paragraph provides that a TP report must be provided to demonstrate compliance with the arm's length principle as stated under Rule 9(1) of the Kenyan TP Rules.

17. That further Rule 9(2) of the Kenyan TP Rules provides that the documents referred to in Rule 9(1) shall include documents relating to -i.The selection of the transfer pricing method and the reasons for the selection.ii.The application of the method, including the calculations made and price adjustment factors considered.iii.The global organization structure of the enterprise.iv.The details of the transaction under consideration.v.The assumptions, strategies, and policies applied in selecting the method; and such other background information as may be necessary regarding the transaction.

18. That in light of the foregoing, there was no requirement for provision of evidence of services received. That instead, the requirement is for provision of a TP report in line with details outlined in Rule 9. That the Appellant has prepared a TP report and basis of cost allocation and hence met the requirements of TP documentation in line with Rule 9.

19. It stated that over and above, the legal requirement for TP documentation outlined above, the Appellant had provided the following documents as evidence of services provided:i.Quarterly management minutes for meeting held on 6th September 2016 and 1st November 2016 that Julian Rutherford who is the Group Finance Director of JFL attended and participated in. Some of the items discussed during the meeting and for the benefit of the Appellant included:a.VAT refundsb.KRA audit on investment deductionsc.Forex hedgingd.Management reportse.Transfer pricing documentation updatef.Bonus schemeg.Financial performance of the Grouph.Capex budget reviewi.Business improvement plansj.ERP implementationk.Tea estates and factoriesl.Energy and R&D sustainabilitym.Health, safety, and sustainabilityn.Legal and HR matterso.Flower businessi.That it is inconceivable that the management would be deliberating on the above issues if there were no services being provided by JFL to the Appellant. From the minutes there were various references to the group's management policies such as forex hedging policy. There is also a mention of JFL working on TP documentation for management charges. The above services align with the services described by the Appellant under paragraph 9. iii.The Appellant made reference to an e-ticket dated 31st October 2016, where Julian, the group Finance Director, was travelling to attend the quarterly management meeting held on 1st November 2016. vi.That further, the minutes mention a meeting held on 14th June 2016 which Julian Rutherford, the Group Finance Director for JFL participated in.v.JFL assisted the Appellant in recruiting the below employees in 2016 year of income: Andrew Joseph Bulman, General Manager, Saosa joined 1st May, 2016

Hylton Sherriff,Systems and Control Engineer, Saosa, joined 1st December, 2016

Simon Welland, Projects Manager, Joined 1st September, 2016vi.Sample email exchanges summarized below:a.Email dated 19th December 2016 from Julian Davies, the Director of Risk and Compliance at JFL to Simeon Hutchinson who is the Appellant's Managing Director advising on correct use of intellectual propertyb.Email dated 16th August 2016 from Tamie Hutchins the Group HR Director to Daniel Kirui, the Appellant's HR Director where Tamie is requesting for a meeting week to discuss how the Appellant manages senior management succession and development for JFL to provide recommendations for improvementc.Email from Julian Davies, the Director of Risk and Compliance at JFL dated 24th October 2016 to Simeon Hutchinson who is the Appellant's Managing Director where Julian is providing support with respect to legal risk managementvii.AfriCert and Fairtrade Certificate received by the Appellant for compliance with sustainability standards following the support received from JFL.viii.Brand guidelines, risk policy and health standards guidelines developed by JFL to be implemented by the Appellant.

20. The Appellant added that it was worth noting that the OECD TP Guidelines as provided at Paragraph 7. 6 in relation to guidance on intra group services does not stipulate that there should be evidence of performance of individual acts of service for a conclusion to be reached that services have been provided in an intra-group context.

21. That based on the description of services, the management services provided by JFL-UK to the Appellant provided it with economic or commercial value to enhance/maintain its business position. By way of illustration, the Appellant provided below examples of how the Appellant's commercial position was enhanced by way of services provided:i.IT support on software use and maintenance was provided by JFL since the Appellant's team did not possess the know-how related to software.ii.To sell tea and flower products in Europe, one must adhere to sustainability standards set out by various regulatory bodies. JFL provided support to the Appellant that facilitated adherence to the sustainability standards.iii.JFL provided support in hiring of key executives and supported on implementation of employee structural changes that took place in 2016 year of income.iv.JFL assisted the Appellant in reviewing complex tax matters, review of audit reports and provided recommendations, reviewing and approving capital investment decisions.v.JFL also ensured that safety standards were set and adhered to and that the manufacturing standards are improved.

22. That further to the above, the Appellant adopted the simplified approach for low value-added services as set out in the OECD TP Guidelines. It averred that this approach had been consistently applied across the group in jurisdictions where James Finlays entities operates. That the simplified approach has a lower standard of documentation regarding intra-group services. The Appellant referred the Tribunal to Paragraphs 7. 49 and 7. 50 of the OECD TPG.

23. The Appellant stated that JFL issued the Appellant with an invoice for the management support services offered as provided for under Paragraph 7. 55 of the OECD TP Guidelines.

24. That it was worth noting that the Respondent had not disputed the Appellant's application of the simplified approach and in the absence of this, was obligated to accept the use of this approach. It was the Appellant's prayer that the Respondent's assessment be set aside in its entirety as it was not premised on the Kenyan TP Rules.

25. The Appellant stated that the Respondent erred in law by alleging that JFL did not have employees and could therefore not have capability to provide management support services to the Appellant, and thus the management support services were not provided through a legal person.

26. It averred that the Services rendered by JFL to the Appellant during 2016 year of income were carried out through JFL's employees. The Appellant referred that Tribunal to the examples and employees it provided details of and the employment contracts of the employees and job descriptions of these employees which it annexed to its pleadings. The Appellant further provided the below the list of employees present in 2016 year of income at JFL, mapped to some of the departments:S/No. Department Job Title Employee name

1 Sustainability Group Managing Director Guy Chambers

2 Sustainability Group Head of Sustainability Michael Pennant Jones

3 Sustainability Sustainability Officer Jo Millar

4 Sustainability Sustainability Sourcing & Supply Manager Sheaian Lee

5 Legal and Risk Director of Corporate Affairs Julian Davies

6 Internal Audit Group Head of Internal Audit David Carr

7 Internal Audit Internal Audit Manager Fiona Fennell

8 Internal Audit Internal Audit Manager John Palfreyman

9 Internal Audit Internal Auditor Delyn Pindai

10 Finance Group Finance Director Julian Rutherford

11 Finance Group Financial Controller John Whittaker

12 Finance Group Management Accountant Sabine Ung

13 Finance Finance Manager Gavin Hill

27. The Appellant asserted that the Respondent's claim that JFL had no employees was therefore grossly misleading and shows that the Respondent had not applied themselves in reviewing the James Finlays group business model.

28. The Appellant made reference to page 1 of the audited financial statements for JFL for 2016 year of income which it averred also provided details of its directors, company secretary and auditors.

29. The Appellant therefore urged the Tribunal to set aside the assessment as it was based on the Respondent's erroneous assumption that JFL did not have employees at its disposal to render the management services to the Appellant.

30. It was the Appellant’s contention that the Respondent erred in law and fact by alleging that the financial statements did not demonstrate that a service was rendered to the Appellant and that there lacks proof of payment made to JFL of Kshs 81,905,760. 00 by the Appellant.

31. The Appellant stated that the management fee expense it incurred were captured under note 10 of the audited financial statements for 2016 year of income and was part of the management fees of Kshs 171,839,000. 00 as captured in the audited financial statements.

32. It stated that the management fees charged by JFL was GBP 552,000. 00. That the Appellant made payment net of WHT to JFL per the bank statement. That therefore, the Respondent's claim that proof of payment made is lacking was erroneous.

33. That further, it is should be noted that the Appellant withheld taxes on payment of management fees of Kshs 81,497,280 to the Respondent of Kshs 10,187,160. 00 per WHT reference KRAWHTLTO4317722016

34. The Appellant insisted that the Respondent erred in fact and law by alleging that where management support services were provided by JFL to the Appellant, the services duplicated functions being performed by the Appellant's in-house employees. It stated that the guidance on whether services are duplicated is contained in Paragraph 7. 11 of the OECD TP Guideline.

35. The Appellant averred that in order for the Respondent's claim on duplication to hold any merit, the Respondent must follow the guidance contained in Paragraph 7. 11 and describe the service in question in detail and stipulate the reason for its claim that the services were duplicated. That the Respondent had not done this but merely made a superfluous statement that the services provided were duplicated. That this notwithstanding, it provided the following illustrations of the distinction between services provided by JFL and the Appellant's own in-house capabilities:i.The finance team at the Appellant's office prepares the capex budget, which is reviewed and appraised by JFL-UK. That JFL-UK also approves capex projects beyond limits that can be approved by the Appellant's local team to globally allocate financial resources efficiently. That this was also a risk mitigation structure to manage risks of spending above the budgeted amounts.ii.The Appellant's strategy team is responsible for implementing short and medium-term strategy. That however, it is the JFL management that sets the longer-term strategy in terms of what markets and countries to operate in, for example, the JFL-UK management, working with the Appellant's executives, evaluated the position and relative profitability of the flowers market and made a strategic decision to exit that market. That this decision was executed by the Appellant's executive team.iii.JFL-UK provided software and IT support for use of this software since the Appellant's IT team does not have the know-how and concentrates more on IT help desk support.iv.As most of Appellant's customers are from the UK, JFL-UK central support team links the Appellant with potential customers and provide market intelligence data to enable the Appellant to access the UK market. That none of the Appellant's employees are involved in developing relationships with customers in the UK.

36. That in line with the above, the management services provided by JFL-UK to the Appellant enhanced the business position of Appellant and are not a duplication of services since no activity performed by JFL-UK is also performed by the Appellant's employee. That the Respondent’s assertions that the services performed by JFL-UK were duplicated functions performed by the Appellants was therefore erroneous.

37. The Appellant submitted that the Respondent erred in fact and law by alleging, without prejudice that the tax loss for 2016 year of income per filed CIT return for 2016 year of income of Kshs 91,021,433. 00 cannot be utilized in arriving at the taxable income/loss for 2016 year of income.

38. That on a without prejudice, in arriving at the taxable income/loss, the Respondent needed to factor in the company's overall tax loss position of Kshs 91,021,433. 00 in line with the provisions of Sections 15(1) and 16(1) of the ITA.

39. The Appellant posited that for 2016 year of income it needed to be established on a standalone basis to determine the losses to be carried forward to subsequent period (2017 year of income). That this had been the approach adopted by the Appellant in the past. That on a without prejudice, based on Section 15(1) and 15(4) of the ITA, the Appellant was allowed a deduction of the loss for 2016 year of income of Kshs 91,021,433. 00 in arriving at the taxable income.

40. It stated that Section 16 of the ITA further provides that for the purposes of ascertaining the total income of a person for a year of income, no deduction shall be allowed in respect of expenditure or loss which is not wholly and exclusively incurred in the production of the income.

41. The Appellant explained that the words "wholly and exclusively", refer to the requirement for a sole intention behind the incurrence of the expenditure to be established while the phrase "in the production of income", requires direct nexus between the earning of the income and the expense. That an expense must therefore be incurred solely to earn income for it to be deducted. That the services provided enhanced the commercial position of the Appellant and were therefore incurred solely to earn business income. That accordingly, the Appellant cannot legally treat the expenses as non-tax allowable unless it is proved that the expenses have no connection with the earning of taxable income.

42. The Appellant further submitted that the Respondent erred in law and fact by alleging, without prejudice that the CIT overpayments for 2016 year of income of Kshs 8,804,554. 00 and WHT paid of Kshs 10,187,160. 00 were not available for offset against any additional CIT liability for 2016 year of income.

43. That Section 39(1) of the ITA provides that an amount of tax which has been deducted under Sections 35, 36 or 37 or has been paid by a person under Section 12A shall be deemed to have been paid by the person chargeable with that tax and shall be set off for the purposes of collection against the tax charged on that person for the year of income in respect of which it was deducted.

44. That on a without prejudice, in determining any additional CIT due, the Respondent needed to factor in the withholding tax (WHT), and advance tax paid for 2016 year of income amounting to Kshs 9,004,554. 00 and WHT paid on management fees of Kshs 10,187,160. 00.

45. That further, the Respondent's claim that WHT and advance tax paid in 2016 year of income by the Appellant was not available for utilization, by alleging that the Appellant lodged a refund application, was incorrect since the Appellant's iTax ledger shows that there are tax overpayments of Kshs 8,870,043. 00

46. The Appellant submitted that the Respondent erred in law and fact by demanding for additional CIT of Kshs 52,522,069. 00 consisting of principal tax of Kshs 30,714,660. 00 and penalties and interest of Kshs 21,807,409. 00

47. The Appellant added that the Respondent had erred in law and fact by imposing late payment interest and penalties on a tax obligation (principal tax) that did not exist in the first place.

48. In this regard, the Appellant submitted that the Respondent's imposition of additional principal tax of Kshs 30,714,660. 00 and interest and penalties of Kshs 21,807,409. 00 was based on an erroneous assessment, and on this basis, the same should be vacated in its entirety.

Appellant’s Prayers 49. The Appellant prayed that the Tribunal considers its grounds of Appeal and finds that;a.This Appeal be allowed.b.The Respondent's objection decision dated 21st September 2022 be hereby wholly set aside.c.The principal tax of Kshs 30,714,660. 00 in its entirety and the associated penalties and interest was incorrectly demanded by the Respondent and be vacated forthwith in its entirety.d.The costs of and incidental to this Appeal be awarded to the Appellant.e.Any other orders that the Tribunal may deem fit.

Respondent’s Case 50. The Respondent’s case is premised on the hereunder filed documents: -a.The Respondent’s Statement of Facts dated 24th November, 2022 and filed on the same date together with the documents attached thereto.b.The witness statement of Philiph Munyao dated 13th April, 2023 and filed on 19th April, 2023 that was admitted in evidence on oath on 28th September 2023 and continued on 17th October, 2023. c.The Respondent’s written submissions dated 30th October, 2023 and filed on the same date.

51. The Respondent stated that it issued a notice of partial assessment to the Appellant on 29th June 2022 for the year period 2016.

52. That the Respondent had disallowed management fee charge incurred by the Appellant in relation to management support received from JFK and notified the Appellant of additional Corporate Income Tax amounting to Kshs. 52,522,069. 00. That the Appellant thereafter lodged a notice of objection against the Respondent's assessment vide a letter dated 28th July 2022.

53. The Respondent averred that it requested for additional support information and later issued its Objection decision on 21st September 2022, disallowing the Appellant's objection in full and upheld the Corporate Income Tax demand.

54. The Respondent was of the view that the only one issue for determination was whether the Respondent's Objection decision and the assessments raised were in conformity with the law.

55. The Respondent averred that the decision to arrive at the confirmed assessments was justified and was in conformity with law under Section 51 of the Income Tax Act, and Sections 31 and 47 of the Tax Procedures Act.

56. It averred that the Appellant did not provide any documentation to demonstrate the persons who provided the services as required by law under Section 59(1) of Tax Procedures Act. That the contracts provided by the Appellant showed persons alleged to have provided the service joined the group in a period later than the assessment period (2016) hence could not have provided the service when they were not employees. To support its arguments, the Respondent cited the provisions of Section 59(1) of the TPA.

57. The Respondent submitted that the Appellant failed to provide proof that a service was rendered in the year 2016. That when called upon to provide evidence of the employees who rendered the services, the Appellant provided contracts of persons employed after the year in question. That therefore, it was logical to assume the said employees never rendered the service in 2016. That the table below shows the date when each of the employees started their employment.Name of Employee Date of Commencement of contract

Thomas Gibbs 1st January 2020

Jennifer Dresse 28th September 2020

Rachael Steed 14th January 2019

Ben Woolf 17th December 2018

Debby Thornley 4th July 2022

58. It was the Respondent's averment that the Appellant ought to be put to strict proof thereof to demonstrate how the financial statements proved that a service was rendered when the employees who alleged to have provided the service were not in employment of the group in the year 2016 and further, demonstrate how they provided evidence of proof of payment at the objection stage despite the same being requested for by the Respondent.

59. The Respondent averred that additional assessment raised in 2022 was done in accordance with Section 31 of the Tax Procedures Act. That at the time of raising the additional assessment the Appellant had already utilized the loss carried forward in the year 2016.

60. The Respondent further stated that the self-assessment return for the year 2017 showed that the Appellant already enjoyed the loss as an allowable expense. That the loss carried forward from the year 2016 was treated as an allowable expense in line with Section 15(1) of the Income Tax Act when the same was deducted in the self-assessment return for the year 2017.

61. The Respondent averred that the 2017 return was filed on 28th June 2018. Thus, when the additional assessment for year 2016 was being raised on 29th June 2022 there was no outstanding loss for year 2016 available for setoff as the loss had already been utilized in the self-assessment return for the year 2017. That the Respondent could therefore not make it as an allowable expense in the additional assessment for year 2016 being raised in year 2022 as that would amount to double counting.

62. The Respondent contended that the Appellant's allegations were false as the Respondent did not deny it any refund. That taxes paid do not affect the debit (tax liability) but only affects the balance payable upon determination of the tax liability where set off is done for any taxes paid in advance.

63. The Respondent averred that since the Appellant was in a loss position in the year 2016 and having no tax liability, the Appellant ought to have sought for a refund in line with Section 47(1) of the Tax Procedures Act.

64. The Respondent averred that it notified the Appellant that the withholding and advance tax paid in the year 2016 were available as credit for the year 2016 if the Appellant had not sought for a refund of the same.

65. Based on the forgoing, the Respondent averred that the demanded taxes were computed in accordance with the law and conclusions drawn from document availed by the Appellant.

66. That the Respondent's decision and assessment was legally and procedurally issued and the Appellant's objection duly considered and objection decision rendered in accordance with the law.

Respondent’s Prayers 67. The Respondent prayed that the Tribunal:1. Dismiss the Appeal.2. Uphold the Respondent's assessment and Objection decision dated 21st September,2022. 3.Award the Respondent the costs of the Appeal.

Issue for Determination 68. Having carefully considered the parties’ pleadings, evidence adduced, submissions made and all documentation provided, the Tribunal is of the view that the only issue calling for its determination is:Whether the Respondent was justified in disallowing management expenses offered to the Appellant by JFL-UK.

Analysis and Findings 69. The genesis of this dispute is the Respondent’s decision to disallow management expenses incurred by the Appellant from related party JFL-UK and subsequently assessing income tax.

70. It was the Appellant’s contention that the group has presence through various subsidiaries and branches across four Continents. It averred that given its vast experience in tea and coffee growing, the group has placed centralized expertise in certain companies one of which is JFL-UK. That this is a common feature of multinational enterprises that centralize expertise to deploy that expertise in an effective and cost-efficient manner. That this feature of multinationals has been recognized in the OECD Transfer Pricing Guidelines 2022, Paragraph 7. 2.

71. That in line with this, JFL-UK is the service provider for the Appellant and other James Finlay Group operations across the world and provided management support services to the Appellant in 2016 year of income.

72. The Respondent on the other hand averred that the Appellant did not provide any documentation to demonstrate the persons who provided the services as required by law under Section 59(1) of Tax Procedures Act. That the contracts provided by the Appellant showed persons alleged to have provided the service joined the Group in a period later than the assessment period (2016) hence could not have provided the service when they were not employees.

73. The Respondent further stated that the Appellant failed to provide proof that a service was rendered in the year 2016. That when called upon to provide evidence of the employees who rendered the services, the Appellant provided contracts of persons employed after the year in question. That therefore, it was logical to assume the said employees never rendered the service in 2016.

74. The Tribunal notes that the Respondent in its objection decision acknowledged receipt of some documents including the invoices but stated that upon review it noted that it did not represent evidence on the nature and extent of services received as per Paragraph 7. 18 of the OECD Transfer Pricing Guidelines.

75. Paragraph 7. 18 of the OECD Transfer Pricing Guidelines provides as follows regarding description of payments;“The fact that a payment was made to an associated enterprise for purported services can be useful in determining whether services were in fact provided, but the mere description of a payment as, for example, “management fees” should not be expected to be treated as prima facie evidence that such services have been rendered. At the same time, the absence of payments or contractual agreements does not automatically lead to the conclusion that no intra-group services have been rendered.”

76. From the above Guideline it is clear that there should be more detailed information regarding the services provided as evidence to support such payment.

77. In the instant case the Tribunal notes that the only invoice attached to the Appellant’s pleadings dated 29th January 2016 and received by the Appellant on 3rd February 2016 indicates the service provided as ‘Management charge 2016’. This clearly falls short of the threshold as set out in the Guideline at Paragraph 7. 18 of the OECD Transfer Pricing Guidelines and therefore required the Appellant to provide additional information with the relevant evidence in support.

78. From the documents attached by the Appellant as evidence, the Tribunal notes that the among others, the Appellant had provided the group’s organogram including the individual profiles of its senior staff and the roles of its various Departments. The Appellant further explained in its Statement of Facts the roles the various Departments may have played in the alleged services provided to the Appellant. The Appellant also attached an air ticket for one Rutherford Julian Michael which indicated travel dates to be September to October 2016 which dates were noted to be subsequent to the invoice date. This ticket could not support the invoice issued 8 months earlier.

79. The Tribunal further noted from the objection decision that although the Respondent had stated that the Appellant had provided some specific contracts of five employees who entered the employment of JFL-UK subsequent to 2016-year of assessment the Appellant did not address this but only attached other contracts without providing reasons why they were not provided to the Respondent at the objection stage.

80. It is now settled that the burden of proof in tax cases lies with the Appellant as is encapsulated in Section 30 of the TAT Act which states 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; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

81. The Tribunal is guided by the decision in the case of Primarosa Flowers Limited vs. Commissioner of Domestic Taxes (2019) eKLR, in which whilst making reference to the Australian case of Mulherin vs Commissioner of Taxation [2013] FCAFC 115 the Court held that: -“……. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied….”

82. From the above decision of the superior court, it is apparent that once the Appellant is served with an assessment, the Appellant ought to push back and show that the assessment was incorrect by providing positive evidence.

83. In the instant case the Tribunal found that the Appellant failed to address the specific documents mentioned by the Respondent in the objection decision and therefore failed to discharge the burden of proof.

84. Consequently, the Tribunal finds that the Respondent was justified in disallowing management expenses offered to the Appellant by JFL-UK.

Final Decision 85. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:i.The Appeal be and is hereby dismissed.ii.The Respondent’s Objection decision dated 21st September 2022 be and is hereby upheld.iii.Each Party to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF FEBRUARY, 2024. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBEREUNICE NG’ANG’A - MEMBERBERNADETTE GITARI - MEMBER