[2023] KETAT 526 (KLR)

Kakiwood Limited v Commissioner of Investigations and Enforcement (Tax Appeal 617 of 2022) [2023] KETAT 526 (KLR) (18 August 2023) (Judgment)

Neutral citation: [2023] KETAT 526 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 617 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

August 18, 2023

Between

Kakiwood Limited

Appellant

and

Commissioner of Investigations and Enforcement

Respondent

Judgment

Background 1. The appellant is a private company incorporated in Kenya. Its core business includes sale of timber. In furtherance of its business, the appellant imports timber from various regions including Congo, for re-sale in the Kenyan market.

2. The respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act. Under section 5(1) of the Act, the respondent is an agency of the Government for the collection and receipt of all tax revenue. Further under section 5(2) of the Act with respect to the performance of its function under subsection (1), the respondent is mandated to administer and enforce all provisions of the written laws as set in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The respondent carried out investigations on the appellant upon receiving intelligence that the appellant could be engaged in tax evasion. The investigations covered the period 2015 to 2020.

4. The respondent established that the appellant had made several imports totaling to 835 entries during the period 2015 and 2020 and declared 21,681,000 kilo grams with a custom duty of Kshs 245,045,539. 00.

5. Upon re-calculation of the taxes due, the respondent established that the appellant ought to have paid Kshs 421,508,962. 00 indicative of an under declaration of the duty payable from the imports, thus had failed to pay Kshs 176,463,423. 00. Consequently, the respondent sent a tax investigation findings report on November 11, 2021. The appellant provided documentation to the respondent which upon review, issued a tax assessment on December 22, 2021 of Kshs 176,463,423. 00.

6. The appellant objected to the respondent’s tax assessments on January 13, 2022 and upon review of the appellant’s objection, the respondent issued an Invalidation Notice dated March 25, 2022 informing the appellant that its Notice of Objection was invalid and the appellant was asked to regularize the Notice of Objection by submitting documents in support of the same.

7. Vide a letter dated May 11, 2022, the respondent confirmed the tax assessment of Kshs 176,463,423. 00.

8. Being aggrieved by the respondent’s decision, the appellant filed its Notice of Appeal on 27th May, 2022.

The Appeal 9. Through its Memorandum of Appeal filed on June 14, 2022, the appellant raised the following grounds of Appeal:a.That the respondent erred in law and fact in invalidating the objection issued by the taxpayer.b.That in issuing the Invalidation Notice, the respondent failed and/or neglected to take into account the fact that the appellant had provided all the documents in support of its objection.c.That the respondent erred in law and fact by arbitrarily issuing an assessment on the appellant’s i-Tax portal without giving a basis for the customs duty uplift, the undeclared purchases and projected sales markup to arrive at an assessment of Kshs 176,463,423. 00. d.That the respondent erred in fact in failing to appreciate that the imports by the Appellant were subjected to a joint verification by the respondent’s officers who issued the appellant with Form F147 to reflect duty adjustments made by the respondent.e.That the respondent erred in law and fact in failing to disclose the basis of the finding that the consignments were allegedly mis-declared.

10. The appellant prays that: -a.The Objection decision of the respondent contained in the letter dated May 11, 2022 be set aside.b.The assessment and demand of Kshs 176,463,423. 00 logged in the appellant’s i-Tax portal be set aside.c.The Appeal be allowed with costs to the appellant; andd.Any other orders that the honorable tribunal may deem fit.

Appellant’s Case 11. In arguing its case, the appellant filed its Statement of Facts on June 14, 2022 and averred that it engaged the respondent with a view to understand the basis of the duty uplift and estimated sales giving rise to the demand of Kshs 71, 647, 103. 00 as the respondent had based its decision on the documents and information alleged to be in its possession in computing corporation tax on projected sales which were marked up at 25%.

12. The appellant contended that it demonstrated that the goods were subjected to a joint verification at the point of entry and duty adjustments made by the respondent vide form F147. Further that the duty assessment by the respondent based on cubic meters of truck is prone to errors as the measurements fail to take into account the actual volume of the individual logs. It contended further that the practice of measuring the truck on which the logs are loaded to arrive at an estimated weight is in itself prejudicial as against timber importers. It therefore had reasonable expectation that the respondent having made duty adjustments based on the truck measurements was satisfied with the uplift issued in the F147.

13. It was the appellant’s argument that the subsequent allegation of mis- declaration by the respondent is not only highly prejudicial against the appellant but is also an act of bad faith since the respondent had an option of making adjustments at the point of verification to not only factor in any under declaration but also the now alleged mis-declaration. It argued further that the respondent’s decision that the consignment was mis-declared is based an alleged benchmarking conducted by the respondent and which has not been availed for interrogation by the appellant, nor has the source been disclosed.

14. The appellant contended that the respondent has on numerous occasions subjected the appellant’s consignments to an 8% duty uplift from the 2% duty rate provided in its Simba system to bring duty to 10%. Further that the respondent has the power to re-classify, re-measure or otherwise make a determination of the appellant’s goods at the point of entry and that any departure from the current mode of estimating duty by the respondent ought to be founded on solid principles and should not be applied retrospectively to the detriment of the appellant.

15. The appellant argued that the respondent in its initial demand alluded to undeclared time purchases that were adjusted to include estimated sales at a 25% mark-up and that in raising the assessment, the respondent has failed to provide a basis for the alleged undeclared purchases nor had it provided a basis for the 25% mark-up applied to arrive at the projected sales.

16. The appellant contended that it provided an analysis of sales made in the period under review and the income accrued thereon for which corporation tax was paid and that a sales estimate based on 25% mark-up is grossly exaggerated and fails to take into account the industry standards and business reality within which the appellant operates.

17. It was the appellant’s contention that the alleged mis-declaration and under declared purchases has no factual or legal basis nor has the respondent adduced any evidence to support its claim and as such the imposition of tax by the respondent is arbitrary and highly prejudicial to the appellant and unless the tribunal intervenes, the appellant shall suffer irreparable economic loss at the hands of the respondent.

Respondent’s Case 18. Through its Statement of Facts filed on July 14, 2022, the Respondent replied to the appellant’s grounds of Appeal as follows:a.In response to ground a of the appeal, the respondent stated that the objection was invalid as it failed to comply with section 51(3) of the Tax Procedures Act (TPA) and that the appellant failed to provide the information /supporting documents, did not state the grounds for objection and the amendments required to make. This was despite requests to provide the same, hence the appellant’s Notice of objection was invalidatedb.The respondent averred that section 23 of the TPA provides that a person shall maintain any document required under a tax law for at least five years, which the appellant is obligated to do. The appellant’s failure to provide documents to support its assertion therefore deems its ground without merit and the same should be dismissed.c.In response to ground b of the appeal the respondent stated that section 159 of EACCMA, 2004 provides that if the respondent suspects that the goods have been undervalued, or dealt with in any way contrary to the Act, it may require the owner of the goods to immediately produce all the books and documents relating in any way thereto, or to any other goods imported, by the owner within a period of five years immediately preceding the requirement. The respondent therefore denies that the appellant provided any documents in support of the objection based on its letters dated March 25, 2022 and May 11, 2022. d.In response to ground c of the Appeal, the respondent contended that the assessments were based on the investigations conducted against the appellant and several other companies that were involved in under declaration/misdeclaration of custom duty. It reiterated that the appellant failed to provide the documents when requested to do so and that the documents it availed to the Tribunal had already been considered by the respondent during the investigations and it is the same documents that informed the additional tax assessment.e.The respondent asserted that whereas there may have been a joint verification between the officers of the respondent and the appellant, the section 235 and 236 of EACCMA, 2004 allows the respondent to conduct post clearance audit in the form of investigations and therefore demand taxes based on the shortfall noted. Therefore, this appellant’s ground of Appeal lacks merit and should be dismissed.f.The respondent stated that it demonstrated in its computations the information it relied on, the sources and reasons for making the tax decisions and that it followed the due process of law including granting the appellant an opportunity to challenge the tax investigations findings and assessment through the letters of March 23, 2022 and May 11, 2022. It stated further that the appellant was given sufficient time to rebut the respondent’s assessment and even though the appellant objected, it never provided the supporting documents and grounds of objection. It therefore follows that the grounds enumerated in the Memorandum of Appeal were never raised during the assessment and objection review stage.g.The respondent asserted that it disclosed the basis of its assessment and the tax investigation findings through the letter dated November 11, 2021 which was shared with the appellant detailing how the consignments were mis-declared hence the appellant’s ground is unsubstantiated and the same should be dismissed.

19. The respondent therefore prays that the Tribunal: -a.Dismiss the appealb.Uphold the respondent’s assessment and decision dated November 11, 2021.

Submissions of the Parties 20. The appellant identified five issues for determination through its Written Submissions dated February 24, 2023 and filed on 27th February, 2023. a.Whether the respondent erred and fact in invalidating the objection issued by the taxpayer.b.Whether the respondent, in issuing the invalidation notice, failed and/or neglected to take into account the fact that the appellant had provided all the documents in support of its objection.c.Whether the respondent erred in law and fact by arbitrarily issuing an assessment on the appellant’s i-Tax portal without giving a basis for the customs duty uplift, the undeclared purchases and projected sales mark-up to arrive at the assessment of Kshs 176,463,423. 00. d.Whether the respondent erred in law and fact in failing to appreciate that the imports by the appellant were subjected to a joint verification by the respondent’s officers who issued the appellant with Form F147 to reflect duty adjustments made by the respondent.e.Whether the respondent erred in law and fact in failing to disclose the basis of the findings that the consignments were allegedly misdeclared.

21. The appellant submitted that the Respondent did not conduct any audit but simply issued the appellant with a Notice of Investigations and Tax Demand dated November 11, 2021 stating that the respondent’s on-going investigation established that the appellant misdeclared consignments relating to the period 2018 to 2020. The appellant also sought to understand the basis of the respondent’s application of the 25% mark-up on the appellant’s projected sales which resulted to the duty uplift.

22. The appellant submitted that it availed various documents including the customs entry documents as proof of imports made by the appellant in the period under review. Further that it demonstrated that the goods were subjected to a joint verification at the point of entry by the respondent’s customs team which subsequently made duty adjustments videform F147 uplifting duty on a few entries and advised the appellant on the duty payable, which it subsequently paid.

23. It averred that the respondent had issued a second duty adjustment at the Busia and Malaba border on the allegation that the appellant had under declared the goods. The appellant obliged and again paid the duty uplift.

24. The appellant submitted that the respondent based its duty assessment on the volume of the truck quantified in cubic meters of the truck, a method which is prone to errors as the estimate fails to take into account the type of wood, the state of the wood and any length variances in the timber. The respondent’s estimation therefore is very excessive as it does not accurately reflect the true volume of the timber.

25. The appellant submitted further that it is well known that when transporting timber, the high variability of species, assortments and moisture content of the wood raw material does not allow the weight of the transported timber to be precisely determined.

26. It was the appellant’s averment that the purported under declaration by the respondent was based on the alleged variance between declarations made in the ASYCUDA system used in Uganda and the Simba system used in Kenya and in arriving at its decision, the respondent neglected to take into account the fundamental difference in the methods used by both jurisdictions when assessing the volume of the timber and subsequent custom value.

27. The appellant submitted that it paid all duty payable on the assessed consignment in full and it seems the respondent sole reason for uplifting taxes is to collect additional tax from the appellant.

28. The appellant asserted that it had a legitimate expectation that the respondent, having made duty adjustment based on the truck measurement was satisfied with the uplifted tax issued in form F147. Further that the respondent outrightly contravenes the doctrine of legitimate expectation that rests a presumption on the respondent to follow certain procedures at arriving at the tax liability and the benefits that accrue from it.

29. It submitted further that the subsequent allegation of misdeclaration by the respondent is not only highly prejudicial against the appellant but is also an act of bad faith on its part since the respondent has an option of making adjustments at the point of verification to not only factor in any under declaration but also the now alleged misdeclaration.

30. The appellant asserted that it provided the respondent with an analysis of entries where the volumes recorded at the point of entry were higher than those recorded at the transit point. It is therefore curious that the respondent doubts the measurements taken by its own customs officers using a method routinely used by the respondent’s customs officers.

31. The appellant submitted that it shared single entry form (Form C.17B) from October 2018 to December 2020 including payment authorization forms, exit customs documents from Congo using the ASYCUDA system, a breakdown of entries with exit measurements when leaving the Uganda border (IM8 Form) and MTO summaries. However, the respondent overlooked these documents.

32. The appellant submitted further by asserting that the respondent’s decision to uplift the duty payable by more than double the duty paid is unreasonable, erroneous and without a basis in law and contravenes its right to fair administrative action as per section 47 of the Constitution of Kenya, 2010 .

33. In its Written Submissions dated February 9, 2023 and filed on February 10, 2023, the respondent has submitted on one issue.

Whether the Respondent was right in rejecting the Appellant’s Objection 34. The respondent submitted that it commenced investigations pursuant to the provisions of sections 235 and 236 of EACCMA upon receiving an intelligence report that indicated that the appellant was engaged in under declaration and smuggling of timber at Busia and Malaba One Stop Border Point station and that the said sections confer powers to the respondent to conduct post clearance audits to verify the accuracy of the entries after the goods have been released from customs control.

35. It stated that it conducted a scientific research with a view to understand the timber business and that it consulted its own records and the appellant’s declaration and conducted investigations covering the period from 2015 to 2020. According to the respondent, its investigation revealed that the appellant wilfully under declared the volume by overstating the wood densities so as to avoid payment of correct custom taxes. It established that the appellant ought to have paid Kshs 421, 508,962. 00 however due to the under declaration, the appellant failed to pay Kshs 176,463,423. 00 to the respondent.

36. The respondent submitted that it issued the appellant with a Notice of Tax Investigations and Tax Demand Letter dated November 11, 2021 contrary to the ground of the Appeal where the appellant claimed that the respondent had failed to disclose the basis of the finding that the consignments were misdeclared. The respondent submitted further that in the letter, it demonstrated its computation, the information it relied on, the source and the reason for making the tax decision. It also disclosed the basis of its assessment and the tax investigation findings detailing how the consignments were misdeclared.

37. The respondent contended that even though there was a joint verification between the appellant’s and respondent’s officers, the law under sections 235 and 236 of EACCMA allows it to conduct a post clearance audit in the form of investigations and thereafter deems taxes based on the shortfall noted as per section 135 ofEACCMA.

38. The respondent submitted that the appellant objected to its letter of November 11, 2021 on January 13, 2022 and that it informed the Appellant of invalidation of notice of objection on March 25, 2022 where upon it invited the appellant to avail documents to regularize the notice of objection which the appellant failed to do hence it confirmed the assessment of Kshs 176, 463, 423. 00 through a letter dated May 11, 2022.

39. It was the respondent’s submission that the appellant failed to discharge its evidential burden of proof under section 107 (1) of the Evidence Act in demonstrating that the assessment by the respondent was in any reasonable manner incorrect or excessive. It submitted further that the appellant’s under declaration constituted a tax offence of knowingly omitting from its tax returns an amount that should have been included.

40. In conclusion, it submitted that it exercised its best judgment appropriately in the circumstances thereby arriving at the tax assessment it did.

Issues For Determination 41. Having considered the parties’ pleadings, submissions and documentation availed, the Tribunal is of the considered view that this Appeal raises a single issue for its determination, being Whether the respondent was justified in invalidating the appellant’s Notice of Objection.

Analysis And Findings 42. The tribunal will now proceed to determine the issue as herein under;

Whether the Respondent was justified in invalidating the Appellant’s Notice of Objection. 43. To appreciate and determine the timelines leading to the respondent’s final communication, the tribunal has noted that vide a letter dated November 11, 2021 the respondent issued a Notice of Tax Investigations and Tax Demand .It then proceeded to issue Assessment Orders dated December 22, 2021. The appellant, responded to the respondent’s Notice of Investigations vide its letter dated January 13, 2022.

44. The respondent thereafter declared the appellant’s Notice of Objection as invalid for failing to meet the requirement of section 51 (3) of the TPA. It demanded more information and documents to be provided within 7 days from the date of the letter.

45. Subsequently the respondent issued another Objection Invalidation through its letter dated May 11, 2022 informing the appellant that its objection was invalidated under section 51(4) of the Act for failure to meet the requirements of section 51(3) of the Act. It was therefore unable to issue a decision under section 51(8) of the TPA. In the same letter, the respondent informed the appellant of its right to appeal the decision to the Tax Appeals Tribunal.

46. Section 51(4) of the Tax Procedures Act directs the respondent on the next course of action after determining that a taxpayer’s notice of objection is invalid. It provides as follows:“Where the Commissioner has determined that a Notice of Objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”

47. From the documentation availed, the appellant objected to the respondent’s demand on January 13, 2022. The respondent therefore had up to January 27, 2022 to invalidate the appellant’s Objection if it deemed it to have contravened the provisions of section 51 (3) of the TPA. The Tribunal has observed that the respondent replied to the appellant’s letter of 13th January, 2022 vide its letter dated March 25, 2022. This was more than fifty (50) days outside the statutory timelines of issuing a notice of invalidation.

48. The tribunal notes that the respondent again issued an Objection invalidation through its letter dated May 11, 2022 where it made reference to the appellant’s Objection letter dated January 13, 2022 and its own letter dated March 25, 2022. It is not clear to the Tribunal what this letter was meant to communicate. On one hand it informs that the respondent is unable to issue a decision under section 51(8) of TPA since the information it requested was never provided. On the other hand, it is informing the appellant of its right to appeal to the Tribunal within 30 days as required under section 52 of the Tax Procedures Act.

49. In view of the foregoing, the Tribunal finds that the respondent was not justified in issuing the notice of invalidation to the Appellant as the same was issued after the lapse of a considerable long duration of time as was envisaged under section 51(4) of the TPA and the effect of which is that the Appellant’s notice of objection was deemed to have been validly lodged for the appropriate consideration by the Respondent. The Respondent ought to have considered the merits of the objection and issued an objection decision.

Final Decision 50. The upshot of the above is that the appeal is merited and the tribunal accordingly proceeds make the following final orders:a.The appeal be and is hereby allowed.b.The respondent’s Invalidation Notice dated March 25, 2022 be and is hereby set aside.c.The respondent to issue an Objection decision in respect of the appellant’s Notice of Objection dated the January 13, 2022 within sixty (60) days of the date of delivery of this Judgment.d.Each party to bear its own costs

51. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 18TH DAY OF AUGUST, 2023. ERIC NYONGESA WAFULACHAIRMAN..........................DELILAH K NGALAMEMBER............................CHRISTINE A. MUGAMEMBER............................GEORGE KASHINDI ABDULLAHI M. DIRIYEMEMBER.............................SPENCER S. OLOLCHIKEMEMBER