[2024] KETAT 594 (KLR)

James Finlay Mombasa Limited v Commissioner of Domestic Taxes (Tribunal Appeal 1318 of 2022) [2024] KETAT 594 (KLR) (Civ) (5 April 2024) (Judgment)

Neutral citation: [2024] KETAT 594 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tribunal Appeal 1318 of 2022

Grace Mukuha, Chair, G Ogaga, Jephthah Njagi, W Ongeti & E Komolo, Members

April 5, 2024

Between

James Finlay Mombasa Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. It is a licensed tea trading business by the East Africa Tea Trading Association.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent carried out an audit on the Appellant’s operations for the periods 2016 to 2020 and issued its preliminary findings on 12th April 2022, where the Respondent raised a preliminary assessment of Kshs. 1,279,544,751. 00 which included principal tax, penalties and interest relating to Corporation tax, Withholding tax and Value Added Tax.

4. On 27th June 2022, the Appellant replied to the Respondent’s preliminary findings to elaborate and provide the necessary information on its activities.

5. The Respondent issued a notice of assessment of Kshs. 4,534,226. 00 in additional income tax on 29th June 2022 for the financial year ended 31st December 2016, which the Appellant objected to in its entirety via an objection letter dated 28th July 2022.

6. The Respondent issued an objection decision on 23rd September 2022, confirming the income tax additional assessment of Kshs. 4,534,226. 00 which included principal tax, penalties and interest.

7. Dissatisfied with the Respondent’s objection decision, the Appellant filed its Notice of Appeal on 21st October 2022.

The Appeal 8. The Appeal is premised on the Memorandum of Appeal dated and filed on 4th November 2022 which raised the following grounds: -a.The Respondent erred in law and fact by asserting that the Appellant subscribed to an unsuitable transfer pricing policy for its profit and cost-sharing formula in 2016, the year under assessment.b.The Respondent erred in law and fact by attempting to infer and introduce a non-existent profit-sharing arrangement between the Appellant and its related party, James Finlay (ME) DMCC ("JFME"), for the period under assessment.c.The Respondent erred in law and fact by seeking to enforce the demand despite the fact that the Appellant and JFME did not have any shared clients for the period under assessment and therefore no profit-sharing arrangement could be applied.d.The Respondent erred in law and fact in disregarding that the subsequently agreed upon 50:50 split between the Appellant and JFME is based on a transfer pricing policy and supporting Function, Assets and Risk analysis detailing each party’s contribution to the profit margin.e.The Respondent erred in law and fact by failing to support the demand with any legal or accounting rationale other than a broad allegation that “evidence in the contrary has not been provided” by the Appellant.f.The Respondent erred in law and fact in disregarding material evidence shared by the Appellant relating to the issues under assessment.g.The Respondent erred in law and fact through lack of transparency, misapplying itself in its findings, and proposing unfounded transfer pricing adjustments.

Appellant’s Case 9. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Its Statement of Facts dated and filed on 4th November 2022 and the documents attached to it.b.Its written submissions dated and filed on 12th June 2023.

10. The Appellant stated that the Respondent carried out an audit on its operations for the periods 2016 to 2020 and issued its preliminary findings on 12th April 2022, where the Respondent raised a preliminary assessment of Kshs. 1,279,544,751. 00 inclusive of principal tax, penalty and interest relating to Corporation tax, Withholding tax and Value Added Tax.

11. The Appellant further stated that in the preliminary letter of findings, the Respondent addressed the transaction between the Appellant and James Finlay (ME) DMCC (JFME) and averred that all income should be declared and taxed on the Appellant in the absence of evidence of activities done by JFME to justify a 50:50 profit split.

12. On 27th June 2022, the Appellant replied to the Respondent’s preliminary findings to elaborate and provide the necessary information on its activities.

13. The Appellant stated that the Respondent issued a notice of assessment of Kshs. 4,534,226. 00 in additional income tax on 29th June 2022 for the year ended 31st December 2016 on the basis that the Appellant did not provide evidence of activities done by JFME to justify a 50:50 profit split between it and its related party, JFME.

14. The Appellant objected to the additional assessment for the year of income 2016 in its entirety via an objection letter dated 28th July 2022.

15. The Appellant averred that the Respondent’s Independent Review of Objections Department reviewed the objection and issued an objection decision on 23rd September 2022, confirming the income tax additional assessment of Kshs. 4,534,226. 00 inclusive of principal tax, penalties and interest, which the Appellant appealed vide a Notice of Appeal to the Tax Appeals Tribunal on 21st October 2022.

16. The Appellant averred that the Respondent indicated in its objection decision that it assessed tax on the basis that:a.No evidence was given to demonstrate the specific work done by James Finlay (ME) DMCC (JFME) towards maintaining the customer relationship.b.The customers were initially only JFME customers and had no contact with the Appellant as far as the purchase of tea was concerned.c.The Appellant failed to provide evidence to show at what stage and how JFME performs the quality control function.d.JFME does not bear product liability risk as that risk is fully managed and controlled by the Appellant.

i. On whether the Respondent erred in law and fact by attempting to infer and introduce a non-existent profit-sharing arrangement between the Appellant and its related party, JFME for the period under assessment and ultimately enforcing the demand without justification. 17. The Appellant reiterated the Respondent’s contention that the Transactional Profit Split Method would not be the most appropriate method to test the transaction between the Appellant and JFME, a conclusion which the Respondent averred that it arrived at because it was unable to establish the specific role carried out by JFME to test the appropriateness of the profit-split approach.

18. The Appellant submitted that the Respondent’s demand for additional taxes on the basis that there was profit-sharing between the Appellant and JFME is unsupported. The Appellant asserted that the profit-split arrangement that the Respondent disputed was non-existent and could not apply in 2016 because the Appellant and JFME did not have any shared clients in that year, as supported by the Appellant’s sales ledger for 2016. That the Appellant did not, during the period under review, split any of its profits or revenue with JFME or any related entity.

19. The Appellant reiterated that the TP policy and associated profit-split arrangement between the Appellant and JFME were entered into and became operative on 3rd January 2019. The Appellant stated that in the response to the preliminary findings, it provided the Respondent with the TP policy and extract of supporting documentation, financial statements and the margin share workings.

20. The Appellant further asserted that its sales transactions involving JFME in 2016 were limited and merely consisted of the sale of blended and straight-line tea with a markup applied as is usual practice in a commercial sale and that after JFME purchased blended and straight-line tea from the Appellant, JFME would also add its markup at the point of sale to its final customers.

21. The Appellant contended that contrary to the Respondent’s argument, it had illustrated that there were no common business activities between itself and JFME concerning shared customers that would necessitate the application of the profit-share arrangement in 2016.

22. In its submission that the Respondent’s entire decision was based on a misapprehension of facts that a profit split should have been applied in 2016, the Appellant relied on Justice Odunga’s pronouncements in the case of Republic vs Kenya Revenue Authority Ex parte Jaffer Mujtab Mohammed (2015) eKLR, where the learned judge held as follows:“a taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the court intervening.”

ii. On whether the Respondent erred in law and fact in disregarding material evidence shared by the Appellant to the issues under the additional assessment and failing to support the demand with any legal or accounting rationale. 23. The Appellant averred that the arrangement in 2016 proved to be commercially unviable since the final consumer perceived the prices of the tea as uncompetitive because the Appellant and JFME were earning separate margins from the sale of the tea at different stages of the transaction which resulted in an inflated final sale price. The Appellant stated that, given this, it and its associated entities resolved to apply a single margin to retain the customers and increase the sales volumes, and that its TP policy determined that the Transactional Profit Split Method (PSM) would be the most appropriate method to apply for the controlled transaction.

24. The Appellant stated that based on the economic analysis carried out on the above transaction, it is of the view that the PSM is the most appropriate method for purposes of determining whether the markup earned by both entities from the transaction is at arm’s length.

25. In averring that PSM was applied in this transaction because of the unique yet interrelated contributions made by the Appellant and JFME, the Appellant cited the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 which recommend the use of the PSM where the transactions are very interrelated.

26. The Appellant stated that it provided the Respondent with the functional, asset and risk analysis of the transaction for both parties as per the TP policy as outlined below:Functional analysis JFML (The Appellant) JFME (Related party)

Market intelligence and customer relationship JFML does not perform significant marketing activities.The marketing team manages existing customers to solidify relationships while developingnew ones. JFME conducts regional market intelligence which includes market studies and customer visits to countries in the Middle East, Africa & CIS region.The data generated from these activities is used to develop the regional strategy and to inform JFML on business decisions.JFME represents the regional business in trade fairs such as the annual Gulf food expo held in Dubai and the Coffee, Tea & Cocoa expo in Moscow. During these fairs, JFME meets and engages JFML customers to promote customer centricity which subsequently enables them to maintain and increase business.JFME employees include Russian, Hindi, Malayalam and Arabic speaking commercial managers who in addition to being tea subject matter experts, provide unique cultural customer and market insights which is key to retaining/increasing regional business for specific customers.All costs related to theseactivities are borne by JFME.

Sales, market development and commercial strategy The commercial strategy teams within the region are each tasked with market development. The purpose is to establish a foothold in tea and coffee. This is mainly done through targeted campaigns aimed at leveraging existing portfolios to increase sales. JFME is responsible for forecasting sales targets and ensuring that they are met by the respective teams within the region.The management team at JFME leads 50% of the regional weekly commercial calls.JFME jointly collaborates with the entire region to achieve the desired market share.

Procurement of tea. Including sourcing, warehousing, packing, labelling and qualitycontrol JFML procures tea from third-party suppliers for resale to its customers.Where required by its customers, JFML will perform packing and labelling for the tea products at its warehouse before delivering them to customers.The products must undergo quality inspection before being delivered to customers. JFME does not perform purchasing, warehousing, packing, or labelling of the tea.JFME is responsible for developing quality control measures within the region.The quality control procedure is to ensure that the tea being exported is of the same quality as the samples sent to and approved by customers.

Logistics JFML is responsible for the export and shipment of the purchased tea from its warehouse to the port of Mombasa. The company is also responsible for notifying JFME of the dispatch of the supply.JFML ships goods directly to customers. The delivery terms i.e., FOB or CIF, are determined subject to each contract and based on the customer’s requirements. JFME monitors and ensures the purchased tea arrives to the customers safely.These duties are managed bythe shipping/cargo controllerand logistics assistant who both report to the commercial manager.

Debt collection and credit management JFML invoices the client however credit management is mainly carried out by JFME. Due to established customer relations, JFME carries out debt collection on behalf of JFML.

Asset analysis JFML (The Appellant) JFME (Related party)

Property plant and equipment This includes warehouses,vehicles, factory machineryand general office equipment. These include general officeequipment.

Personnel JFML has skilled personnelwho assist in carrying outfunctions outlined above. JFME has skilled personnelwho assist in carrying outfunctions outlined above

Risk analysis JFML (The Appellant) JFME (Related party)

Market risk JFML assumes market risksarising from volatility in the prices of the tea in the global market. JFME faces competition in the global tea market with a significant number of tea manufacturers and traders.

Price risk JFML manages the risk of amismatch between increasing purchasing prices which may not be reflected in the selling price. JFME is directly exposed to the adverse price fluctuation of tea in the global market.

Product quality risk All tea products sold must pass the quality control procedure. JFML faces the risk of recalling or replacing products. JFME bears the product liability risk if quality specifications are not met.

Credit risk JFME bears the credit risk associated with transacting with third-party customers. JFME bears the credit risk associated with transacting with third-party customers

27. The Appellant summarised as below, the commercial business flow from which the Appellant and JFME have four customers on which the PSM is applied, given the inter-related nature of the transactions:a.JFME identifies customers/leads, qualifies leads, prepares bid/sales the pitch, and develops the blend/product.b.JFME and the Appellant discuss pricing strategy.c.The Appellant receives orders from customers, sources, ships and invoices.

28. The Appellant attached to its Appeal extracts of the 2019 margin share workings illustrating the application of the 50:50 split between the Appellant and JFME to support the application of the PSM for the four customers, and stated that the four customers to which the PSM is applied, are not present in the Appellant’s sales ledger for 2016.

iii. On whether the Respondent erred in law and fact in disregarding material evidence shared by the Appellant to the issued additional assessment and failing to support the demand with any legal or accounting rationale. 29. The Appellant submitted that it provided the TP policy for 2016 and all the relevant documents to the Respondent such as sales ledgers and customer ledgers to prove the non-existence of any shared clients with JFME in 2016.

30. The Appellant argued that the Respondent has, contrary to the detailed documentation provided by the Appellant, failed to provide any legal basis for imputing a profit-split arrangement for 2016 and for arguing that the 50:50 profit-split outlined in the TP policy is improper.

31. The Appellant contended that the Respondent rejected its objection without any justification while citing the Appellant’s failure to provide documents.

32. The Appellant relied on the case of Fleur Investments Limited v Commissioner of Domestic Taxes & another [2018] eKLR where the court held that: -“This case falls squarely on all fours with the case of Municipal Council of Mombasa v Republic & Umoja Consultants Ltd (supra), because clearly, the respondents failed to consider the very relevant facts that their request for an audit meeting had already been met, all documents requested for had been availed and examined, and yet the assessment was premised on the erroneous premise that the appellant had failed to comply with the same requests. The need to take into account relevant considerations and ignore irrelevant facts in the decision making has close nexus with the need to act reasonably.”

33. The Appellant also relied on the case of Shreeji Enterprises (K) Limited vs Commissioner of Investigations & Enforcement TAT No. 58 and 186 of 2019 where this Tribunal quoted the case of Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 and held as follows: -“The Appellant’s initial onus of proof is met where a prima facie case is made out. The onus shifts to the Minister to rebut the prima facie case made out by the taxpayer and to prove the assumptions. The appellant adduced clear, unchallenged and uncontradicted evidence. The respondent adduced no evidence whatsoever. Where the onus has shifted to the Minister and the Minister has adduced no evidence whatsoever, the taxpayer is entitled to succeed.The Minister should be able to rebut such [prima facie] evidence and bring forth some foundation for his assumptions. The Minister does not have a carte blanche in terms of setting out any assumption which suits his convenience. On being challenged by evidence in chief he must be expected to present something more concrete than a simple assumption.”iv.On whether the Respondent erred in law and fact through lack of transparency, misapplying itself in its findings, and proposing unfounded transfer pricing adjustments.

34. The Appellant averred that there was no transparency in how the Respondent arrived at its conclusion and that with no insights given for the process used, cherry-picking by the Respondent cannot be ruled out. The Appellant supported its assertion by referring to the decision of the Mumbai Income Tax Appellate Tribunal in the case of Federal Mogul Anand Bearing India Ltd., (Case No. TS 580-1TA T-2020 (MUM)-TP) where that Tribunal rejected the imputing of a higher operating profit for the company based on a comparable which the tax administration had identified.

35. The Appellant affirmed that the discrepancies in the partial assessment workings for 2016, assessment order and assessment letter dated 29th June 2022, further illustrate the lack of clarity and transparency in how the Respondent arrived at its assessment.

36. The Appellant further decried that the Respondent’s decision did not state the legal or factual basis of its decision with the level of detail required by the law, which has left the Appellant grappling in the dark in an attempt to challenge and dispute the Respondent’s decision with the specificity required by the law.

37. The Appellant reiterated that the Respondent’s assessment is not transparent and based on the misguided application of the Appellant’s TP policy and a non-existent profit-sharing agreement for 2016.

Appellant’s prayers 38. The Appellant prayed for the Tribunal: -a.To set aside the Respondent’s objection decision dated 23rd September 2022 in its entirety with costs to the Appellant.b.To issue any other remedies that the Tribunal deems just and reasonable.

Respondent’s Case 39. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 2nd December 2022 and the documents attached thereto.b.Its Written Submissions dated 12th June 2023 and filed on 27th June 2023.

40. The Respondent stated that it issued an additional assessment on 29th June 2022 to the Appellant following an audit, the preliminary findings of which were shared with the Appellant on 12th April 2022. The Respondent averred that the additional assessment was premised on the Appellant’s subscription to an unsuitable transfer pricing (TP) policy that formed the basis of its profit and cost-sharing formula.

41. The Appellant, dissatisfied with the assessment, objected to it on 28th July 2022. The Respondent stated that it requested the Appellant to provide further documentation to justify the use of its TP policy and averred that the Appellant did not furnish the Respondent with the same at the assessing and objection review stages.

42. The Respondent issued its objection decision on 23rd September 2022, which the Appellant appealed to the Tribunal.

43. In response to the Appellant’s grounds of appeal, the Respondent stated that the Appellant did not provide sufficient evidence to substantiate the profit and cost-sharing formula despite being requested.

44. The Respondent further averred that the Appellant was established to be an active entity within the Kenyan space and therefore it was inferred that it should by default get the greater share of the profits.

45. The Respondent stated that the TP policy provided by the Appellant stated that there was an arrangement between the Appellant and James Finlay (ME) DMCC (JFME) where the Appellant would share profits with JFME for direct sales to JFME’s customers in Dubai. That the Appellant selected the profit-split method as the most appropriate method to determine the arms-length profits attributable to the parties because “both parties to the transaction made valuable and unique contributions to the transaction”. That this arrangement was meant to eliminate the application of margins by both the Appellant and JFME on the sales made to customers in Dubai.

46. The Respondent noted that the Appellant further averred that the decision to apply a single margin on the sale of the tea to these customers and thereafter split the gross margin 50:50, was made to retain the customers and increase the sales volumes and therefore, was based on the economic analysis carried out on the transaction.

47. The Respondent further stated that according to the policy, the Appellant sources for the tea and organizes the supply logistics of the tea to customers in Dubai directly on behalf of JFME. That JFME on the other hand is responsible for providing supporting activities such as customer relationship management, research and improving the quality of tea samples, sending tea orders to the Appellant, marketing of tea, debt collection and financial documentation.

48. The Respondent stated that the functional analysis as per the TP policy is summarised in the following table:FAR Description JFML JFME

Functions Purchasing and sourcing data X

Warehousing and storage X

Logistics X X

Marketing X

Sales management X

Customer relationship management X

Credit management X

Assets Property, plant and equipment X

Skilled personnel X X

Office equipment X X

Risks Market risk X

Inventory risk X

Product liability risk X

Supply risk X X

Non-performance/delivery risk X X

Credit risk X

49. The Respondent reiterated the Appellant’s explanation that it has mainly two customers in Dubai and that the Appellant stated that customer requirements are received and dealt with by the commercial team.

50. The Respondent noted that the Appellant booked the entire cost of procuring and exporting the product and the sales reported reflect a sale to JFME and not the final price to the third-party customer.

51. The Respondent also noted that the Mombasa tea auction process creates a quality-based pricing system, rewarding high quality since the buyers base their bidding on their assessment of the auction lots.

52. That before the auction, a sample of the tea lot is sent to potential bidders and a group of tea tasters. That the seller’s reserve price is a confidential function of the Appellant’s tea taster’s valuation, which also possibly acts as a signal to the bidders. In addition, that this process is handled by the Appellant hence the quality control function is also fully performed in Kenya.

53. The Respondent stated that it requested the Appellant to provide supporting documents for the following, and that the Appellant provided a summary of the functions carried out by JFME.a.Evidence of work done by JFME for the functions of logistics, marketing, customer relationship management, sales management and credit management including but not limited to sample communications between the parties, interventions by JFME, reports, feedback from customers, etc.b.The detailed workings or the 50:50 split between the Appellant and JFME clearly showing details of all the costs taken into account, the sales to the third-party customers and sample supporting invoices, the profits from these transactions, the split and how the same is accounted for in the books of the Appellant.

54. The Respondent stated that the Appellant provided the Respondent with a summary of the functions carried out by JFME in a functional analysis from which the Respondent noted the following under the headings of:a.Market intelligence and customer relationship.b.Sales, market development and commercial strategy.c.Procurement of tea.

a. On market intelligence and customer relationship 55. The Respondent noted that regarding market intelligence and customer relationship, the Appellant stated that JFME performs market intelligence information in the region and attends various fairs.

56. The Respondent further noted that the 50:50 split was in relation to two main customers in United Arab Emirates as alluded to by the Appellant and therefore any function must be specific to these two customers.

57. The Respondent submitted that the Appellant did not provide any evidence to show the specific work done by JFME towards maintaining the customer relationship.

b. On sales, market development and commercial strategy 58. The Respondent asserted that the onus of proof fell upon the Appellant to demonstrate the impact of sales and market development efforts in increasing or maintaining sales from the two customers.

59. The Respondent submitted that the Appellant did not adduce any evidence to show that the customers were initially only JFME customers and had no contact with the Appellant as far as the purchase of the tea is concerned.

60. The Respondent further stated that the Appellant did not adduce evidence of the specific work done on marketing activities in relation to the customers.

c. On procurement of tea 61. The Respondent differed with the Appellant’s assertion that JFME was responsible for developing quality control measures within the region where the quality control procedure is to ensure that the tea being exported is of the same quality as the samples sent to and approved by customers.

62. The Respondent noted that the Appellant stated that the tea exported is tasted at JFME before and after purchase to ensure that it conforms to the quality required and thereafter shipped directly to the customer. The Respondent submitted that the Appellant failed to adduce documentation demonstrating at what stage JFME performs quality control.

63. The Respondent noted that the Appellant and JFME bear the market, price and credit risk. The Respondent further noted that the product risk is fully managed and controlled by the Appellant. The Appellant concluded that based on the Appellant’s business process, most value concerning its core business is located in Kenya, thus, the Appellant, being the active entity within Kenya, ought to get the profits.

64. The Respondent submitted that the Appellant did not adduce any documentary evidence demonstrating the functions carried out by JFME that were necessary for ascertaining the tax liability of the Appellant. The Respondent referred to Section 24(2) of the Tax Procedures Act (TPA) which allows it to assess a taxpayer’s liability using any information available to it and to this extent, the Respondent averred that it operated within the confines of the law by using the data availed.

65. The Respondent noted that both the Appellant and JFME bear the market, price and credit risk. The Respondent, however, disagreed that JFME bears the product quality risk as that risk is fully managed and controlled by the Appellant as explained in the Respondent’s letter of preliminary findings.

66. The Respondent averred that its audit findings were guided by the OECD Guidelines and Transfer Pricing Rules, and further averred that the Appellant did not provide the supporting evidence both at the assessing and objection review stage despite the Respondent requesting for the same and that the TP documents from the Appellant did not provide the date used in the benchmarking study.

67. The Respondent highlighted in its submissions that the Appellant adduced an additional bundle of documents at the point of filing submissions, which included the JFME customer ledger and export handling ledgers, JFME customer account and TP policy for the year 2016 as attached by the Appellant and marked as Appendix A, B & C of the Appellant’s documents in its submissions. That the Appellant confirmed the same under paragraphs 16-18 of its written submissions.

68. The Respondent submitted that the documents that are now being provided by the Appellant at the submissions stage were never at any time provided to the Respondent during the objection review stage or at the point of filing the Appeal.

69. The Respondent urged the Tribunal to only look at the documents filed at the Tribunal at the point of filing the Appeal as per the Appellant’s list of documents prepared and filed on 4th November 2022. The Respondent submitted that the Appellant is reopening new grounds of appeal different from those which were stated in the objection and as such, attempts to steal the march against the Respondent. That this ought not be allowed.

70. The Respondent emphasized that if the Appellant wanted to adduce these further documents after filing the Appeal, it would have sought leave of the Tribunal to do so, but it failed to. That by producing these documents at the point of submissions, the Appellant not only denied the Respondent its right to a fair hearing and an opportunity to interrogate the documents, but also raises new grounds of appeal on issues that were not raised at the point of objection contrary to Section 56(3) of the TPA.

71. The Respondent urged the Tribunal to not only expunge the said documents, but also the paragraphs in the submissions which the documents have been referred to.

72. The Respondent reiterated that from the foregoing, it relied on its best judgement based on information available to it in compliance with Section 31 of the TPA while raising the assessments.

73. The Respondent submitted that the Appellant did not discharge its burden of proof to prove that the tax decision was incorrect as provided under Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act.

74. The Respondent relied on the judgment of the Tribunal in Tax Appeal No. 552 of 2021 Pipe Man Limited v Commissioner of Investigation & Enforcement where it was held that: -“It is the Appellant’s task to keep all the records that are relevant to its business transactions and provide the same before the Respondent whenever required or whenever the Appellant disputes assessments raised by the Respondent... The Respondent’s work is to collect all the necessary information required to raise its assessments and then the Appellant’s duty is to, whenever in disagreement, provide an objection with all the necessary evidence required to support its position.

66. The Respondent will then use this information to make an objection decision by either confirming its position or varying it whenever necessary taking into consideration the information provided by the Respondent in its Objection.”

75. That in Ushindi Exporters Limited v Commissioner of Investigation and Enforcement (Tax Appeals Tribunal No, 7 of 2015) the Tribunal held that: -“The burden of proving that the tax assessment is excessive or should have been made differently never shifts to the Respondent and is placed squarely on the Appellant as Section 30 (a) and (b) of the Tax Appeals Tribunal Act…By purporting to shift the burden of proving that the tax assessment against it was incorrect or should have been different the Appellant failed in discharging the burden, placed upon it by law.”

76. The Respondent cited Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes 2020] eKLR, where the High Court in determining the issue as to whether the Commissioner followed the correct procedure or correctly assessed a company’s tax liability found out that the Appellant had failed to provide the relevant documents despite several requests by the Commissioner. That the High Court upheld the decision of the Tribunal, holding that since the Appellant had not provided all the documents, the Commissioner was right in reaching the assessment based on the material available.

77. The Respondent finally submitted that the Appellant did not discharge its burden of proving that the additional assessments were erroneous since the Appellant did not fully adduce the required documentation.

Respondent’s prayers 78. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s objection decision of 23rd September 2022. b.Dismisses this Appeal with costs to the Respondent.

Issues For Determination 79. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the documents attached to the Appellant’s written submissions are admissible.b.Whether the Respondent’s objection decision dated 23rd September 2022 is proper in law.

Analysis And Findings 80. The Tribunal analysed the issues that call for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned objection decision.

a. Whether the documents attached to the Appellant’s written submissions are admissible. 81. The Respondent highlighted in its submissions that the Appellant adduced an additional bundle of documents at the point of filing submissions, which included the JFME customer ledger and export handling ledgers, JFME customer account and transfer pricing (TP) policy for the year 2016 marked as Appendix A, B & C of the Appellant’s documents in its submissions. The Appellant confirmed this to the Tribunal.

82. The Respondent submitted that the documents that are now being provided by the Appellant at the submissions stage were never at any time provided to the Respondent during the objection review stage or at the point of filing the Appeal.

83. The Respondent urged the Tribunal to only look at the documents filed at the Tribunal at the point the Appellant filed its Appeal on 4th November 2022. The Respondent argued that Appellant was opening new grounds of appeal different from those which were stated in the objection and as such attempting to steal the match against the Respondent.

84. The Respondent emphasized that if the Appellant wanted to adduce further documents after filing the Appeal, it should have sought leave of the Tribunal to do so, but it failed to. The Respondent submitted that by producing these documents at the point of filing its submissions, the Appellant not only denied the Respondent its right to a fair hearing and an opportunity to interrogate the documents, but also raised new grounds of appeal on issues that were not raised at the point of objection, contrary to Section 56(3) of the TPA which provides as follows: -“In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.”

85. The Respondent urged the Tribunal to expunge the said documents and the paragraphs in the Appellant’s submissions which the documents were referred to.

86. The Tribunal referred to Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 which provides the following on the Appellant’s statement of facts: -“(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal.(2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact.”

87. The Tribunal is guided by the ruling in the case of Family Fashion Clothing Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E050 of 2021) [2021] KEHC 406 (KLR) (Commercial and Tax) where the court at paragraph 15 of the ruling outlined the principles governing the admission of additional evidence as laid down in Tarmohamed & Another v Lakhani & Company [1958] EA 567, where in that case, the Court of Appeal for Eastern Africa adopted the decision in Ladd v. Marshall [1954] WLR 1489 and stated: -“Except in cases where the application for additional evidence is based on fraud or surprise:‘to justify reception of fresh evidence or a new trial, three conditions must be fulfilled: first, it must be shown that the evidence could not have been obtained with reasonable diligence for use at the trial; secondly, the evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive; thirdly, the evidence must be such as is presumably to be believed, or in other words, it must be apparently credible, though it need not be incontrovertible.”

88. Further the Tribunal adopted the holdings in Wanjie & Others v Saikwa & Others [1984] KLR 275, where the court observed the following on admitting additional evidence: -“This rule is not intended to enable a party who has discovered fresh evidence to import it nor is it intended for a litigant who has been unsuccessful at the trial to patch up the weak points in his case and fill up omissions in the Court of Appeal. The Rule does not authorize the admission of additional evidence for the purpose of removing lacunae and filing in gaps in evidence. The appellate court must find it needful. Additional evidence should not be admitted to enable a plaintiff to make out a fresh case in appeal. There would be no end to litigation if the rule were used for the purpose of allowing the parties to make out a fresh case or to improve their case by calling further evidence. It follows that the power given should be exercised very sparingly and great caution should be exercised in admitting fresh evidence”

89. From the cited provisions of the law and cases, it is clear that while the decision as to whether or not to admit additional evidence on appeal is an exercise of judicial discretion. Similar to any other discretionary authority, this one too must be utilized prudently and not arbitrarily.

90. The Tribunal, in consideration of its discretion of admitting new documents, deemed it necessary to determine if the Appellant adhered to proper procedure when presenting new evidence in its submissions, and whether such evidence is admissible.

91. It is not in dispute that all the evidence that the Appellant attached to its submissions was available during the filing and even at the hearing of the Appeal before the Tribunal. The Appellant ought to have in its Statement of Facts referred to evidence it proposed to adduce at the hearing of the Appeal, otherwise, make an application seeking leave to adduce additional evidence during the hearing.

92. The Tribunal is of the considered view that if the Appellant knew that the documents it attached to its submissions were necessary for the determination of the matter in issue before the Tribunal, the Appellant ought to have sought leave to adduce further evidence by way of an application. The Tribunal established that there is no evidence on record of the Appellant seeking such leave. Having decided not to seek leave to adduce further documents and to rely on those documents at the point of filing its Statement of Facts are choices that the Appellant made willingly and has to live with it. Litigation must come to an end.

93. Further, the Tribunal finds that it would be prejudicial to the Respondent to allow the Appellant to use this opportunity to patch up and/or fill up the gaps in its case at the Appeal stage without sufficient reason why the Appellant failed to attach the evidence to its Statement of Facts, or why the Appellant failed to seek leave of the Tribunal to adduce additional documents.

94. The Tribunal, thus, finds that the additional evidence introduced by the Appellant with its submissions is not admissible.

b. Whether the Respondent’s objection decision dated 23rd September 2022 is proper in law. 95. It is not in dispute by the Appellant and the Respondent that the controlled transaction under review is the sale of goods, specifically the sale of blended and straight-line tea. The Appellant sells this blended and straight-line tea to its non-resident related party, James Finlay (ME) DMCC (JFME). JFME is a non-resident company as adduced by the Appellant and the Respondent. The residency of JFME has not been defined by any of the parties in their pleadings.

96. The Appellant stated that it provided the Respondent with the functional, asset and risk analysis of the controlled transaction for both parties as per the TP policy as outlined below. The Respondent did not controvert that it was provided with this analysis and even referred to it in its pleadings.Functional analysis JFML (The Appellant) JFME (Related party)

Market intelligence and customer relationship JFML does not perform significant marketing activities.The marketing team manages existing customers to solidify relationships while developingnew ones. JFME conducts regional market intelligence which includes market studies and customer visits to countries in the Middle East, Africa & CIS region.The data generated from these activities is used to develop the regional strategy and to inform JFML on business decisions.JFME represents the regional business in trade fairs such as the annual Gulf food expo held in Dubai and the Coffee, Tea & Cocoa expo in Moscow. During these fairs, JFME meets and engages JFML customers to promote customer centricity which subsequently enables them to maintain and increase business.JFME employees include Russian, Hindi, Malayalam and Arabic speaking commercial managers who in addition to being tea subject matter experts, provide unique cultural customer and market insights which is key to retaining/increasing regional business for specific customers.All costs related to theseactivities are borne by JFME.

Sales, market development and commercial strategy The commercial strategy teams within the region are each tasked with market development. The purpose is to establish a foothold in tea and coffee. This is mainly done through targeted campaigns aimed at leveraging existing portfolios to increase sales. JFME is responsible for forecasting sales targets and ensuring that they are met by the respective teams within the region.The management team at JFME leads 50% of the regional weekly commercial calls.JFME jointly collaborates with the entire region to achieve the desired market share.

Procurement of tea. Including sourcing, warehousing, packing, labelling and qualitycontrol JFML procures tea from third-party suppliers for resale to its customers.Where required by its customers, JFML will perform packing and labelling for the tea products at its warehouse before delivering them to customers.The products must undergo quality inspection before being delivered to customers. JFME does not perform purchasing, warehousing, packing, or labelling of the tea.JFME is responsible for developing quality control measures within the region.The quality control procedure is to ensure that the tea being exported is of the same quality as the samples sent to and approved by customers.

Logistics JFML is responsible for the export and shipment of the purchased tea from its warehouse to the port of Mombasa. The company is also responsible for notifying JFME of the dispatch of the supply.JFML ships goods directly to customers. The delivery terms i.e., FOB or CIF, are determined subject to each contract and based on the customer’s requirements. JFME monitors and ensures the purchased tea arrives to the customers safely.These duties are managed bythe shipping/cargo controllerand logistics assistant who both report to the commercial manager.

Debt collection and credit management JFML invoices the client however credit management is mainly carried out by JFME. Due to established customer relations, JFME carries out debt collection on behalf of JFML.

Asset analysis JFML (The Appellant) JFME (Related party)

Property plant and equipment This includes warehouses,vehicles, factory machineryand general office equipment. These include general officeequipment.

Personnel JFML has skilled personnelwho assist in carrying outfunctions outlined above. JFME has skilled personnelwho assist in carrying outfunctions outlined above

Risk analysis JFML (The Appellant) JFME (Related party)

Market risk JFML assumes market risksarising from volatility in the prices of the tea in the global market. JFME faces competition in the global tea market with a significant number of tea manufacturers and traders.

Price risk JFML manages the risk of amismatch between increasing purchasing prices which may not be reflected in the selling price. JFME is directly exposed to the adverse price fluctuation of tea in the global market.

Product quality risk All tea products sold must pass the quality control procedure. JFML faces the risk of recalling or replacing products. JFME bears the product liability risk if quality specifications are not met.

Credit risk JFME bears the credit risk associated with transacting with third-party customers. JFME bears the credit risk associated with transacting with third-party customers

97. The Appellant asserted that its sales transactions involving JFME in 2016 were limited and merely consisted of the sale of blended and straight-line tea with a margin applied as in a commercial sale.

98. The Appellant contended that the manner in which the controlled transaction between it and JFME was conducted in 2016 differed from how it was conducted in 2019. The Appellant attempted to delineate the transaction in the two years by stating that there was a profit-sharing agreement between it and JFME which was entered on 3rd January 2019 and did not apply in 2016 as purported by the Respondent.

99. The Respondent stated that in the TP policy provided by the Appellant, the Appellant selected the profit-split method as the most appropriate method to determine the arms-length profits attributable to the Appellant and James Finlay (ME) DMCC (JFME) because “both parties to the transaction made valuable and unique contributions to the transaction”. That the Appellant would split the gross margin 50:50 with JFME for direct sales to JFME’s customers in Dubai in order to retain the customers and increase the sales volumes and therefore was based on the economic analysis carried out on the transaction.

100. The Respondent submitted that the Appellant did not adduce any documentary evidence demonstrating the functions carried out by JFME that were necessary for ascertaining the tax liability of the Appellant. The Respondent referred to Section 24(2) of the Tax Procedures Act (TPA) which allows it to assess a taxpayer’s liability using any information available to it.

101. The Respondent disagreed that JFME bears the product quality risk as that risk is fully managed and controlled by the Appellant as explained in the Respondent’s letter of preliminary audit findings. The Appellant did not respond to this assertion by the Respondent.

102. The Respondent averred that the Appellant did not provide the supporting evidence both at the assessing and objection review stage despite the Respondent requesting for the same and that the TP documents from the Appellant did not provide the date used in the benchmarking study. For these reasons, the Respondent alleged to recompute the 50:50 profit split and reassign the gross margins from JFME to the Appellant and confirmed the additional income tax assessment for 2016.

103. The Appellant stated in its objection to the Respondent’s assessment that the Respondent based its assessment on a non-existent profit-sharing arrangement between the Appellant and JFME which could not apply in 2016 because the profit-split arrangement between the Appellant and JFME was entered into and became operative on 3rd January 2019. Further, the Appellant in its objection averred that it had attached its 2016 financial statements and related party ledger.

104. The Appellant further stated that in its response to the preliminary audit findings, it provided the Respondent with the TP policy and extract of supporting documentation, financial statements and the margin share workings.

105. The Tribunal reviewed the parties’ pleadings and determined that the issue under dispute is whether the 2016 assessment that arose from the Respondent’s transfer pricing adjustment was proper in law.

106. The Tribunal noted that the Appellant only presented its justification for the transfer prices charged to JFME in its response to the Respondent’s preliminary audit findings and did not elaborate on the transfer prices it applied thereafter.

107. In the response to the Respondent’s preliminary audit findings, the Appellant averred that it applied Internal Comparable Uncontrolled Pricing (CUP) to determine the arm’s length prices it charged to JFME for the sale of blended and straight-line teas. Therein, the Appellant averred that it had conducted a functional and comparability analysis to select the transfer pricing method of Internal CUP and averred that it had attached benchmarking studies to this response. The Tribunal observed that the Appellant did not attach to its Appeal these benchmarking studies and documents to support the functional and comparability analyses that it claimed to have undertaken to arrive at its selection of the Internal CUP transfer pricing method for its 2016 controlled transaction with JFME.

108. The Tribunal examined all of the admissible documents that the Appellant attached to its Appeal and found that only the documents listed below were appended:a.Appellant’s sales ledger for 2016. b.Profit-share agreement between the Appellant and JFME dated 3rd January 2019. c.Extracts of 2019 margin share with detailed workings of the application of the 50:50 split between the Appellant and JFME.

109. Cognizant of the functional analysis of the controlled transaction cited by the Appellant in its Statement of Facts, and the evidence adduced by the Appellant, the Tribunal was unable to uphold the Appellant’s position against the Respondent’s additional assessment, as the Appellant did not demonstrate that the prices it charged to JFME in 2016 were at arm’s length in accordance with Section 18(3) of the Income Tax Act and the Income Tax (Transfer Pricing) Rules, 2006 L.N. 67/2006, and as guided by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

110. The Tribunal observed that the Appellant neglected to expend effort in presenting the transfer pricing of its transactions with JFME for 2016 and instead focused on the transfer pricing of its transactions with JFME for 2019. The evidence adduced by the Appellant was underwhelming and not sufficiently persuasive. Based on the aforementioned, the Tribunal finds that it is not possible to concur with the Appellant’s position on the 2016 additional assessment solely from its averments and 2016 sales ledger.

111. Section 18(3) of the Income Tax Act provides that: -“Where a non-resident person carries on business with a related resident person or through its permanent establishment and the course of that business is such that it produces to the resident person or through its permanent establishment either no profits or less than the ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of that resident person or through its permanent establishment or from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arm's length.”

112. Rule 9 of the Income Tax (Transfer Pricing), Rules, 2006 require that a person to whom these Rules apply provide the Commissioner with information, including books of accounts and other documents relating to transactions where the transfer pricing is applied. Paragraph (2)(a) and (b) of Rule 9 provide that: -“(2)The documents referred to in paragraph (1) shall include documents relating to—(a)the selection of the transfer pricing method and the reasons for the selection;(b)the application of the method, including the calculations made and price adjustment factors considered;”

113. It is well accepted and anchored in law that the onus of proving that a tax decision is wrong, excessive or incorrect lies upon a taxpayer. Section 56(1) of the Tax Procedures Act (TPA) and Section 30 of the Tax Appeals Tribunal Act (TAT) provide as follows:Section 56(1) of the TPA: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”Section 30 of the TAT Act: -“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;b.in any other case, that the tax decision should not have been made or should have been made differently.”

114. The Tribunal is further guided by the holding in the case of Digital Box Limited v Commissioner of Investigations and Enforcement [2020] where the Tribunal held as thus: -“…in this case, the Appellant is the one seized of the desire to prove that the Respondent used extraneous information in arriving at its assessment. Thus, according to the provisions of the Evidence Act, the Tax Procedures Act and the Tax Appeals Tribunal Act, the burden of proof falls upon the Appellant.”

115. Due to the Appellant’s failure to discharge its burden of proving that the Respondent’s assessment was wrong, by demonstrating that the transfer prices it charged to JFME in 2016 were at arm’s length, the Tribunal finds that the Respondent did not err in issuing the income tax additional assessment for 2016.

Final Decision 116. The upshot of the above analysis is that the Tribunal finds that the Appeal fails and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 23rd September 2022 be and is hereby upheld.c.Each party to bear its own costs.

117. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 5TH DAY OF APRIL, 2024. GRACE MUKUHACHAIRPERSONGLORIA A. OGAGA JEPHTHAH NJAGI MEMBER MEMBERDR WALTER J. ONGETI DR. ERICK KOMOLO MEMBER MEMBER