[2025] KETAT 216 (KLR)

Kebirigo Tea Factory Company Limited v Commissioner of Domestic Taxes (Tax Appeal E756 of 2024) [2025] KETAT 216 (KLR) (2 May 2025) (Judgment)

Neutral citation: [2025] KETAT 216 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E756 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

May 2, 2025

Between

Kebirigo Tea Factory Company Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is one of the 71 tea factory companies managed by KTDA Management Services Ltd, a wholly owned subsidiary of Kenya Tea Development Agency Holdings Ltd. The factories process green leaf into made tea and are managed by its subsidiary KTDA Management Services Ltd through management agreements.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority 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 functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 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 conducted an audit on the Appellant for the period July 2018 to June 2022 and issued the Appellant with a notice of assessment dated 14th February 2024 in respect of income tax, PAYE and VAT seeking to recover Kshs 210,859,035. 00. Subsequently, the Respondent issued assessment orders for VAT, PAYE and corporate income tax liability dated 8th March 2024.

4. The Appellant thereafter lodged an objection to the assessments vide a letter dated 5th April 2024. The Respondent reached out to the Appellant vide an electronic mail dated 18th April 2024 and requested them to validate their objection and subsequently issued it with an invalidation notice dated 18th April 2024. On 25th April 2024, the Appellant submitted a revised objection.

5. The Respondent reviewed the Appellant's revised objection and issued its objection decision dated 31st May 2024 partially rejecting the Appellant's objection. Being dissatisfied with the Respondent's decision, the Appellant filed this Appeal vide Notice of Appeal dated 28th June,2024 on even date.

The Appeal 6. The Appellant lodged the memorandum of appeal dated 11th July 2024 on even date wherein the Appellant raised the following grounds of appeal:a.That the Respondent erred in law and fact in their input-output analysis through the applied assumption of a direct relationship between the amount of packaging materials and the quantities of tea produced and thereafter sold, delivered, dispatched or stocked whose logic was not substantiated and therefore lacked a legal basis.b.That as a consequence of the above assumption on Input-Output correlation, the Respondent erred in fact and law in the application of the 3 tests:i.Processed tea versus dispatched tea - That the Respondent erred in fact in relying upon the assumption that all processed output unaccounted for represent omitted sales despite the explanation provided by the Appellant that not all dispatches represent sales;ii.Packaging materials versus dispatched tea - That the Respondent erred in fact in relying upon the strict and inflexible assumption that all used packaging materials reflect output product sales ignoring the fact that not all dispatches represent sales. Further, the Respondent erred in their arbitrary disregard of the taxpayer's 'intercompany borrowings' as a justification of any possible variance; andiii.Utilized pallets versus dispatched tea - That the Respondent erred in fact in relying upon the assumption that the variance on the utilized pallets represent omitted inventory of output whose sales were not accounted for. The Respondent ignored the fact that not all dispatches represent sales and not all dispatches utilize pallets and thus invalidating the assumption made.c.That the Respondent erred in demonstrating open bias against the Appellant by failing to consider all the material evidence presented to them by the Appellant thereby deriving findings that were inherently invalid and without the force of law. In this regard, the Appellant averred that all documents requested were provided which makes the assertion that documents were not provided inaccurate.d.That the Respondent erred in law and in fact in determining all sales categorized as Direct Sales Overseas (DSO) in the financial statements as taxable supplies and consequently charging the general rate of 16% VAT.e.That the Respondent erred in law and in fact in declining to zero rate all the export supplies in the full knowledge that the Appellant is the ultimate exporter of its tea and not KTDA Management Services Limited, the Appellant's agent.f.That the Respondent erred in law and fact in requesting for almost 100% verification of documentation without considering the reasonableness of the request and the Appellant's nature of business and the possible time it could take to provide the requested documentation.g.That the Respondent erred in law in not considering the 2022 objection raised in iTax with respect to the 2022 tax assessment pertaining to VAT and corporate income tax on the basis that it may have been provided late therefore not affording the Appellant sufficient time to respond to the assessment and a fair hearing.h.That the Respondent erred in law and in fact in the assessment of the PAYE payable and/or due on the Christmas vouchers paid to the Board of Directors for the period under review. The Appellant averred that the PAYE paid on the vouchers stands correct and the Respondent could not provide support documentation to support the figures included in the assessment.

Appellant’s Case 7. The Appellant filed its statement of facts dated 11th July 2024 on even date. On 21st February, 2025, the Tribunal granted the Appellant leave to re-file its supporting document earlier provided using hyperlinks in physical form. The Appellant also relied on the testimony of Ms. Beatrice Langat and Mr. Samuel Obiero whose witness statement dated 17th February 2025 and filed on even date were admitted as evidence in chief during the hearing on 20th March, 2025. The Appellant also filed written submissions dated 4th April 2025 on even date.

8. The Appellant stated that the Respondent commenced an audit on the Appellant's operations for the financial period 2018 to 2022 on 22nd March 2023, founded upon Section 59 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”). The audit was conducted through physical site visit and following the conclusion, the Authority presented preliminary findings via email on 16th August 2023, to which the Appellant responded vide the letters dated 13th November 2023 and 16th November 2023.

9. The Respondent then conducted an additional audit assessment for the period between July 2018 and June 2022, and thereafter issued a notice of assessment to the Appellant dated 14th February 2024, to the effect that the factory owes additional tax of Kshs 210,859,035. 00 based on the Respondent’s valuation methods, and further posted the same on the Appellant's i-Tax ledger.

10. The Assessment served as a demand of the above highlighted amount of Kshs 210,859,035. 00 as tax payable for the financial years 2018 to 2022, inclusive of principal and interest, under the tax heads Corporate Income Tax for Kshs 52,350,357. 00, Pay as You Earn (PAYE) for Kshs 51,033,210. 00 and Value Added Tax ("VAT") at Kshs 107,475,467. 00; The decision was communicated through the Assessment Order No. KRA202425527183 dated 8th March 2024.

11. The Appellant lodged its objection application dated 5th April 2024, disputing the tax decision of the Respondent stating the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments. The Respondent acknowledged the notice of objection application lodged on 5th April, 2024 and summarily noted that the Appellant had objected to assessed tax amounting to Kshs 151,983,380. 17, plus an additional Kshs 117,791. 80, totalling to an objected amount of Kshs 152,101,171. 99.

12. The Respondent replied in writing, responding to the notice of objection lodged by the Appellant taxpayer that the application had supposedly not been validly lodged. The Notice contained in a letter dated 18th April 2024. To comply with the Respondent's instructions, the Appellant, lodged a revised Notice of Objection dated 25th April 2024 in writing to the Respondent.

13. The Appellant stated that it submitted a comprehensive array of documents in support of the objection. The Respondent considered the objection and allowed the same in part, through objection decision dated 31st May 2024.

14. The objection decision declared as follows:i.The tax assessed under the 'processed tea vs. dispatched tea', the 'packaging materials vs. dispatched tea' and the 'utilized pallets vs. dispatched tea' analyses were confirmed due to lack of sufficient documentations in support of otherwise.ii.That the assessment on DSO export sales had been confirmed, citing issues on verification of actual exports and a further verification of the local sales against the export sales; andiii.That the acknowledged taxable amount for PAYE on Christmas vouchers was positive but there remained an unexplained deficit amount of Kshs 425,000. 00 that would stand confirmed.

15. According to the Appellant, following the above adjustments and reasoning, the tax amount figures against the Appellant were reviewed by the Respondent to Kshs 174,831,004. 00: Corporate Income Tax principal and interest – Kshs 62,490,622. 00;

Pay as You Earn (PAYE) principal and interest – Kshs 322,275. 00; and

Value Added Tax ("VAT" principal and interest- Kshs 112,018,107.

Corporate Income Tax and Value Added - Input Output Analysis 16. According to the Appellant, the Respondent assumed a direct correlation between the use of paper sacks and polybags as inputs and the quantities of tea produced and distributed. The Appellant noted that the Respondent conducted tests comparing processed tea versus dispatched tea, concluding that variances indicated unaccounted processed tea, implying omitted sales amounting to 1,253. 368 in respect of the period 2018/2019. The Appellant also stated that comparisons of packaged materials (paper sacks vs dispatches test) led the Respondent to conclude that variances represented unaccounted packaging materials, indicating further omitted sales amounting to 127,422,990 in respect of the period 2019/2020 and 14,016,763 for the period 2018/2019.

17. The Appellant added that, under declared sales as per packaging materials (polybags vs dispatches test) amounted to 11,626,818 for 2021/2022, 468,240 for 2020/2021, and 134,604 for 2018/2019. It stated that discrepancies in utilized pallets versus dispatched tea were interpreted as omitted stocks of processed tea, underscoring unrecorded sales amounting to 1,563,312 for the period 2021/2022 and 5,782,474 for the period 2018/2019.

18. The Appellant opposed this decision on three limbs as follows:(a)Processed and Dispatched Products

19. The Appellant averred that the discrepancies between processed and dispatched products do not necessarily indicate under-declaration of sales, as not all dispatched outputs equate to sales but the Respondent's position was that the quantities applied were correct, making reference to the working notice of assessment that indicate matching information between the parties' records except for the year 2019; which was stated to be the only year where the projected closing stock exceeded the closing stock as per the records and also the only year assessed under this issue.

20. According to the Appellant, the Respondent communicated that the discrepancy found was due to the averred different quantities of dispatches to the Mombasa Tea Auction, concluding that they needed all dispatches for the Mombasa Tea Auction for 2019. The Appellant submitted that the Respondent used the wrong quantities for dispatches to Mombasa Tea Auction and further, that not all sales represent dispatches. It argued that dispatches could be inferred from processed teas that were shipped from the factory either to the Mombasa warehouses, the purchaser's premises or to the factory door sales.

21. The Appellant added that sales on the other hand, can be made from processed teas at the factory, opening stocks at the warehouse and/or factory and teas dispatched to the warehouse. The Appellant therefore maintained that while the figures applied may match both records (with exception to 2019 as noted), the Respondent still had not provided reasonable justification and sound reason as to why the averred variances strictly represent omitted sales that are arbitrarily translated to gains or profits subject to taxation.

22. In response to the Respondent's request for 100% documentation, the Appellant stated that this was unreasonable, but if for accuracy and show of good faith, the Appellant was willing to provide a smaller sample that it would determine would achieve the same objective. The Appellant therefore requested the Tribunal to nullify the assessment of Kshs 1,253,368. 00 assessed under both income tax and VAT indicated to be under-declared sales as per made tea sourced from the “processed tea vs dispatch” as the Appellant averred it was based on assumption without legal basis whatsoever.

23. In the alternative, the Appellant stated that it was agreeable for a re-computation using the correct figures and basis for the assessed year as provided in its objection.

(b) Purchased Packaging Materials and Dispatched Products 24. The Appellant averred that the variances between purchased packaging materials and dispatched products do not imply under-declaration of sales, since not all dispatched items are sold. The Appellant noted that the Respondent in the objection decision outlined alleged discrepancies where according to the Respondent’s workings in some instances, different figures were used in stock movements and ledger analysis than those used by the Respondent. It added that there was a difference in the applied weight per bag for polybags and paper sacks and the opening and closing stocks were also inconsistent.

25. The Appellant averred that not only was the Respondent's assumption invalidated by the fact that not all dispatched items were sold but also that the Respondent proceeded to use wrong and incorrect figures in more than one instance. The Appellant stated that the Respondent used the wrong quantities of opening stocks and green leaf processed in some years and with respect to the calculation for packaging materials, the Respondent's workings were misled for the reasons that they failed to consider the disclosed facts that different grades of teas are packed in different quantities and different packages may be used depending on the intended destination. Therefore, the Appellant asserted that the packaging material had not been aligned to dispatches.

26. According to the Appellant, the reason for the difference between the Respondent's assertions as recorded in contrast to the Appellant workings, was a case of misunderstanding of the real-time facts, that was best sourced from the Appellant first hand; which the Appellant reasonably explained and supported. The Appellant stated that in defiance of the same, the Respondent proceeded to confirm the originally assessed amount to the extent of Kshs 153,669,415. 00 and further decided that it had the option of assessing the amount upwards to reflect a revised computation under the issue.

(c) Utilized Pallets and Dispatched Products 27. With regard to this issue, the Appellant averred that the discrepancies do not signify under-declared sales, as not all dispatches use pallets and not all dispatched products are sold, but that fact notwithstanding. It noted that that the Respondent confirmed the originally assessed amount to the extent of Kshs 7,345,786. 00 and further decided that it had the option of assessing the amount upwards to reflect a revised computation under the issue.

28. The Appellant averred that the Respondent's assumptions on the above highlighted tests of various instances of direct correlation was fundamentally flawed. The Appellant stated that it is available to work with the Respondent to carry out any other alternative tests to provide comfort to the Respondent if needed rather than rely on the wrong basis used.

29. The Appellant stated that Section 43 of the TPA requires the tax authority to base its assessments on the best information available. It asserted that the Respondent's reliance on erroneous assumptions and external sources without adequately considering the Appellant's explanations and supporting documents violated this provision.

30. The Appellant averred that they provided sufficient supporting documentation to explain the discrepancies between processed and dispatched products, purchased packaging materials and dispatched products, and utilized pallets and dispatched products. Therefore, the Respondent's decision to uphold the tax assessments for reasons of insufficient documentation was unjust and unfounded.

31. It stated that in complying with Section 35 of the TPA, it maintains records that are sufficient to explain all transactions and to enable the Commissioner to determine the correct amount of tax and despite this, the Respondent failed to adequately consider the same, in blatant contravention of Section 54 [sic] which imposes upon the tax authority duty to ensure that assessments are made in a fair and reasonable manner.

32. The Appellant contended that the Respondent's reliance on flawed assumptions and failure to consider the provided documentation contravenes this requirement and holds bias against the Appellant. Further, the Appellant stated that the Respondent did not provide support for the confirmed Assessment of Kshs 3,957,039. 00 for the year 2022. In addition, the Appellant stated that the Respondent's indication of a potential upward revision of the assessments due to the purported lack of sufficient documentation was unwarranted. The Appellant asserted that it demonstrated compliance with documentation requirements and provided reasonable explanations for the discrepancies.

33. It stated that section 30 of the TPA governs the Respondents power to amend assessments. The Appellant averred that that such amendments must be based on concrete evidence and reasonable grounds. It stated that the Respondent's reliance on flawed assumptions and disregard for the Appellant's documentation does not constitute reasonable grounds for an upward revision.

34. The Appellant cited the case of Republic v Kenya Revenue Authority Ex-Parte Bata Shoe Company (Kenya) Limited [2014] and Kenya Revenue Authority v Habimana Sued Hemed & Another [2019] to support the position that tax assessments must be based on accurate and reliable information and that flawed assumptions and disregard for the taxpayer's explanations and documentation render an assessment unreasonable and unjust.

35. It also cited the case of Bidco Oil Refineries Limited v Commissioner of Customs Services (2014] wherein the court ruled that tax assessments should be made on the basis of clear and concrete evidence and that assessments based on assumptions and external sources without adequately considering the taxpayer's documentation are unjustifiable.

36. Consequently, the Appellant requested the Tribunal to overturn the Respondent's tax assessments and direct a fair reassessment based on accurate and reliable information, duly considering the Appellant's explanations and documentation.

(d) Inter-Factory Borrowings 37. The Appellant defended its inter-factory borrowing and lending claim on the basis that it produced the necessary supporting documentation, and thereby challenged the Respondent’s disallowance.

38. The Appellant contended that its inter-factory borrowing and lending practices are legitimate business transactions, founded upon Section 15(2)(a) of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”), that allows deductions for expenses incurred wholly and exclusively in the production of income. It argued that the inter-factory borrowing and lending was essential to the Appellant's operations and directly related to income production, and that the Appellant availed adequate supporting documentation. The Appellant contended that the Respondent’s disallowance of these transactions, therefore, was unjustified and contrary to standard business practices.

39. The Appellant noted that the Respondent disallowed these transactions by relying on unidentified and undisclosed third parties to invalidate the Appellant's intercompany borrowings demonstrated in the reconciliations. The Appellant asserted that this procedure was improper and lacked transparency. The Appellant also averred that it was not given an opportunity to address or challenge the information provided by these third parties, violating principles of natural justice and fairness.

40. It relied on Article 47 of the Constitution of Kenya, 2010 (hereinafter “the Constitution”) to state that it guarantees the right to fair administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair. Consequently, the Appellant maintained that the Respondent’s reliance on undisclosed third-party information without providing the Appellant an opportunity to respond contravenes this right. Further, the Respondent cited section 4 of the Fair Administrative Action Act, CAP 7L of the Laws of Kenya (hereinafter “FAAA”) which mandates that every person has the right to be given written reasons for any administrative action that adversely affects their rights. The Appellant maintained that it was not provided with adequate reasons or the identity of the third parties therefore it claimed that the Respondent violated this provision.

41. The Appellant relied on the case of Republic v Kenya Revenue Authority Ex Parte Stanley Mombo Amuti [2018] to state that the court held that reliance on undisclosed information by a tax authority, without giving the taxpayer an opportunity to respond, violates principles of natural justice and fair administrative action.

42. Based on the foregoing, the Appellant requested the Tribunal overturn the Respondent’s disallowance of inter-factory borrowing and lending transactions and direct a fair reassessment that duly considers the Appellant's explanations and supporting documentation. The Tribunal should also instruct the Respondent to refrain from relying on unidentified and undisclosed third parties in making future assessments

VAT-Direct Sales Overseas (DSO) 43. The Appellant stated that it clarified to the Respondent that the use of the management company, KTDA, as an agent for exporting tea. The Appellant stated this has been the common and accepted practice in the industry for over 25 years.

44. According to the Appellant, the Respondent acknowledged the fact that tea destined for export is zero rated as per the second schedule of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) under which the supply of tea-to-tea auction centres or the direct export of tea by the Appellant qualify as zero rated for VAT purposes.

45. The Appellant noted that the Respondent has generally accepted that the DSO sales should essentially qualify for zero rating and therefore has acknowledged the Appellant's business model that the factory uses through the agency.

46. The Appellant stated that the issue of contention arises where the Respondent averred the failure by the Appellant to provide a reconciliation of the DSO export and domestic ledgers for verification. The Appellant maintained that it provided information on a sample basis to demonstrate the export of the tea but the Respondent initially requested for 100% verification of the dispatches for all the years. The Appellant stated that this request was not reasonable given the voluminous nature of the client business.

47. It noted that the Respondent in objection decision requested a complete review of the dispatches to the warehouse for 2019 and sample review of complete dispatches for two months each year for the other years. The Appellant noted the request and in- show of compliance, communicated the fact that the requested documents were voluminous and thereby not possible to avail as requested. However, to remedy this, the taxpayer stated that, in good faith, it offered the option of either arranging a site visit to the head office in Nairobi or extra time allowance to retrieve said documents.

48. The Appellant stated that given the circumstances, the documents having to be consolidated from more than 11 factories, the Appellants request was reasonable and fair. However, the Appellant noted that the Respondent disregarded the said proposals and proceeded to apply a tax liability on the DSO sales to the amount of Kshs. 112,018,107. 00.

49. The Appellant averred that the Respondent's improper classification of DSO Sales, while disregarding the Appellant's position was irrational, unjust and in contravention of Section 17 of the VAT Act.

50. The Appellant stated that if the Tribunal felt that the Respondent’s aim had not been attained, the Appellant requests for more time to retrieve the documentation based on an agreed reasonable sample thereof or grant request that the Respondent visits the Appellant’s offices for a walk through to witness the process from the point of dispatch from the factory, arrival at the warehouse, sale at the auction and shipping of the DSO tea.

51. The Appellant further asserted that it is normally under statutory audit and during such audits, the audit carries out similar tests but only on a sample basis and there has not been an issue regarding the verification of the exports. Further, the Appellant noted that it is under close scrutiny by the Tea Board of Kenya and is normally obligated to comply with specific requirements and there should be no risk relating to the DSO sales.

52. The Appellant therefore requested the Tribunal to overturn the Respondent's determination that the DSO sales be considered taxable supplies subject to a 16% tax rate.

PAYE -On Christmas Vouchers 53. The Appellant stated that both parties agreed that PAYE should be due on Christmas vouchers as these represent gains from employment. However, the Appellant noted that the figures used by the Respondent do not agree with the figures used by the Appellant and no supporting documentation has been provided by the Respondent to substantiate amounts used.

54. The Appellant therefore requested that the Respondent be directed to recompute the liability based on the correct information provided by the Appellant. The Appellant urged the Tribunal to vacate the excess liability demanded. The Appellant asserted that no payments were made in 2022 but the Respondent assessed PAYE on Kshs 425,000. 00 without substantiating the amount.

55. It was the Appellant's position that the figures used by the Respondent for assessment periods 2021 and 2022 stand incorrect. The Appellant stated that it went as far as to tabulate the correct figures, in the objection as it ought to have been assessed. Further, the Appellant stated that it substantially paid that which was due and uncontested between the parties and will lodge a waiver of interest and penalties relating to any principal tax conceded and paid.

Value Added Tax and Corporate Income Tax- 2022 Assessment 56. The Appellant stated that it raised an objection in i-Tax with respect to an amount of Kshs. 117,791. 82 relating to the 2022 assessment pertaining to both VAT and corporate income tax for the year 2022. However, the Respondent did not take time to consider the objection.

57. According to the Appellant, the Respondent erred in law in not considering the objection and the Appellant would like the Respondent to vacate the assessment and consider the objection in i-Tax.

58. Apart from statement of facts, the Appellant put in written submissions wherein it submitted that the Respondent erred in assessment of Income tax – Company amounting to Kshs 62,490,622. 00 on basis that the Respondent’s analysis was inaccurate, and that the Appellant’s reconciliation using the Input – Output analysis was not considered by the Respondent for lack of supporting documents.

59. The Appellant relied on the case of Commissioner of Investigations and Enforcement v Kidero (Income Tax Appeal E028 of 2020) [2022] KEHC 52 (KLR) to submit that the duty to maintain records and provide documents to the Commissioner is dependent on the circumstances of the case as follows:“Whether the taxpayer has provided sufficient evidence to meet the threshold of proof required to discharge its burden must of course depend on the nature of the subject or transaction and the circumstances of the case bearing in mind the aforesaid duty placed on the taxpayer to keep records."

60. It also submitted that the Respondent erred in assessment of VAT amounting to Kshs 112,018,107. 00-packaged materials & Direct Sales Overseas. The Appellant submitted that the figures arising from under declared sales as per made tea (processed tea vs dispatches test), Under-declared sales as per packaged materials (paper sacks vs dispatches test), Under-declared sales as per packaging materials (polybags vs dispatches test) and under-declared sales as per pallets are erroneous.

61. In support of its position, the Appellant relied on the cases of Commissioner of Domestic Taxes vs W.E.C. Lines (K) Limited (Tax Appeal E084 of 2020) (2022] KEHC 57 (KLR) (Commercial and Tax) (31 January 2022; and Cofftea Agencies Limited v Commissioner of Domestic Taxes (TAT 74 of 2016).

62. It also submitted that the Respondent erred in assessment of Income Tax – PAYE amounting to Kshs 322,275. 00. It submitted that the figures used by the Respondent do not agree with the figures used by the Appellant and that no supporting documents were provided by the Respondent to substantiate amounts used. The Appellant also submitted that the Respondent used wrong figures in the calculations.

63. Consequently, the Appellant prayed for the following reliefs:a.Declaration that the Objection Decision demanding Kshs 144,697,267 is null, void, and be quashed entirely.b.An order Restraining the Respondent from enforcing the demand for assessed taxes amounting to Kshs 144,697,267. 00. c.An order allowing the Appeal with costs awarded to the Appellant.d.Any other further reliefs and remedies that this Tribunal deem just and equitable in the circumstances.

Respondent’s Case 64. In response to the appeal, the Respondent filed its Statement of facts on 15th August 2024 on even date. The Respondent also filed written submissions dated and filed on 4th April 2025.

65. The Respondent stated that in the tea industry, it is standard operational practice to package tea in specified quantities using standardized packaging materials such as paper sacks and polybags. Each unit of these materials corresponds to a specific volume or weight of tea. For instance, a paper sack is typically used to pack a fixed weight of tea, such as 20 kilograms. This standardization ensures consistency and efficiency in handling and transporting tea products.

66. The Respondent stated that the relationship between packaging materials and tea quantities is quantitatively consistent. It added that if a factory uses 1,000 paper sacks, and each sack holds 20 kilograms of tea, it is reasonable to infer that approximately 20,000 kilograms of tea were produced and packaged. This consistency forms a reliable basis for tracking and verifying production and inventory levels.

67. According to the Respondent, effective inventory control relies on accurate tracking of inputs (packaging materials) and outputs (packaged tea). It added that any discrepancy between the quantities of packaging materials used and the recorded quantities of tea produced, sold, or stocked can indicate potential issues such as production anomalies, unrecorded sales, or inventory shrinkage. Thus, monitoring this relationship is crucial for maintaining accurate records and ensuring fiscal responsibility.

68. The Respondent stated that the assumption of a direct relationship is further validated through third-party confirmations from associated factories. These confirmations indicate that the amount of packaging materials used aligns with the quantities of tea processed and dispatched, thereby reinforcing the logical and factual basis of this relationship.

69. The Respondent maintained that the principles of accounting and inventory management support the premise that input materials (packaging) should correspond to output products (packaged tea). It maintained that this alignment is crucial for accurate financial reporting and compliance with tax regulations. The Respondent averred that its analysis adheres to these principles, ensuring that the Appellant's declarations are verifiable and transparent.

70. It averred that there is a well-substantiated and logical basis for the direct relationship between the amount of packaging materials and the quantities of tea produced.

71. The Respondent argued that its input-output analysis is grounded in industry standards, quantitative consistency, inventory control practices, third-party validations, and established legal and accounting principles. It therefore, the applied assumption is not only reasonable but necessary for accurate and fair assessment.

72. The Respondent stated that it did not assume all dispatches represented sales as demonstrated by the notice of assessment workings and that the Respondent factored in the samples, dispatches free issues and wastage and damaged. Further, from the documents provided, the Respondent stated that the Appellant's assertions could not be verified. It added that the only detailed breakdown of dispatches provided was for the year 2022, for which no source dispatch tea reports statement were provided to cross-match with the Excel data.

73. The Respondent stated that a request for the Appellant to provided source dispatch records to support its assertions was not honoured. According to the assessing team's findings, the only year where the projected closing stock exceeded the closing stock as per the records was 2019. It noted that this was the only year that was assessed under this issue.

74. According to the Respondent, this discrepancy was due to different quantities of dispatches to the Mombasa Tea Auction (BP1, D1, PD, PF1) between what the Respondent established and what the Appellant reported.

75. To ensure accuracy, the Respondent stated that it requested all dispatches for the Mombasa Tea Auction (both MA and DSO) for 2019, which the Appellant did not provide therefore, based on above the tax as assessed under this issue was confirmed as the Appellant was unable to explain the variance and reconcile the same with source documents.

76. The Respondent averred that gaps were noted in the Appellant's reconciliation during objection review are as follows:i.In stock movements and ledger analysis than those used by the Respondent. These discrepancies were not been explained or supported with source documents such as stock movement records and customer statements;ii.During the audit, the Respondent established the corresponding weight per bag for polybags as 60 kg and for paper sacks as 71 kg. The Appellant adjusted these to 50kg and 69kg respectively without solid support;iii.The opening and closing stocks as recorded by the Appellant differ from the Respondent's findings. It noted this variance was not explained or supported with source documents, such as inventory records for the period 2017 to 2022, clearly showing quantities purchased under each category, usage stock movement records, and customer statements; andiv.From the documents provided, the Appellant's assertion that incorrect quantities of opening stocks and green leaf processed were used in some years could not be verified because the copies of the year-end stock sheets were not accompanied by stock movement records and no explanation was provided for the discrepancies between these sheets and the information supplied to the assessing team. Additionally, the monthly tea reconciliation documents provided were sample tea reconciliation ledgers and tea reconciliation statements for specific months, which did not correspond to the same months, preventing effective cross-matching. Based on these findings which were never addressed, the Respondent confirmed the assessment as assessed.

77. The Respondent stated that wooden stands on which packed tea in paper sacks are placed on for easy handling during loading and off-loading and to avoid any damage from the floor.

78. According to the Respondent, during packing, a single pallet is loaded with twenty (20) paper sacks. Therefore, there is also a direct relationship between pallets utilized and paper sacks of made tea sold, dispatched, delivered or stocked.

79. It noted that utilized pallets versus dispatched tea shown variances which represent omitted stocks of made tea whose sales have not been accounted for. It averred that all the above tests showed variances which were brought to charge.

80. The Respondent stated that while tea destined for export is zero rated, and while it is also acknowledged the business model that the factory uses is sales through the agency, the taxpayer failed to provide a reconciliation of its DSO export and domestic sales ledgers for verification. Therefore, the Respondent was left with the question as to whether all the tea manufactured in the factory and classified as DS0 was fully exported as the documentation required including the cross matching between export data and factory records (dispatches, payments and statement from KTDA) was not visible.

81. It was the Respondent’s case that it requested a complete review of the dispatches to the warehouse for 2019, as the Appellant's total dispatches did not match the Respondent's findings. Additionally, a sample review of complete dispatches for two months each year for the other years was requested. From these samples, the Respondent required tracking the dispatched sales to the KTDA statement of accounts, cross-matching dispatched records and export data with primary records to the point of payment, and linking payments to sales invoices and quantities dispatched.

82. The Respondent averred that tax issue for determination was therefore not the VAT treatment of export tea but verification of actual exports out of Kenya and a verification of the local vs export sales. The Respondent maintained that the Appellant failed to satisfy the Respondent that all the tea declared under exports was fully accounted for through both primary records and cross matching with KTDA records and payments.

83. The Respondent averred that the Appellant paid Christmas gift vouchers for the period under review. It was noted that PAYE on Christmas vouchers paid to the Board of directors was not remitted to the Respondent for the period under review.

84. PAYE was therefore computed on Directors' Christmas gift vouchers in line with Section 3(2)(a)(i) of ITA read together with Section 5(2)(a) where gains or profits from employment is expounded to include wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commission, bonus, gratuity or subsistence, travelling, entertainment or other allowance received in respect of employment or services rendered and any other amount so received in respect of employment or services rendered.

85. The Respondent stated that in the appeal herein, no evidence was adduced to explain the variance and the Appellant therefore failed to discharge its burden of proof under Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”).

86. The Respondent averred that there were variances between employment costs subjected to PAYE and those declared in the income tax returns. It pointed out that the details of the variance are contained in page 6 of the objection decision.

87. According to the Respondent, the Appellant objected on the ground that the difference was on account of manpower payment on outsourced contractual labour but failed to provide any reconciliation for the same and therefore the assessment was confirmed. The Respondent charged withholding tax on subcontracted labour costs as indicated at page 7 of the objection decision.

88. The Respondent noted that although the Appellant objected to the WHT assessment, it failed to provide any reconciliation on the primary supporting evidence. The Respondent therefore confirmed the assessments.

89. The Respondent averred that the assessment issued was not erroneous and consequently, the entire assessment was not invalid as averred by the Appellant and the amounts assessed and demanded were lawfully done.

90. The Respondent further averred that the entire assessments were not premised on estimations, overstatements and variances of the Appellant's records, which assumption was entirely not erroneous considering that the Appellant did not demonstrate to the Respondent, by adducing documentary evidence and supporting documents as relates to the assessed amounts.

91. It also stated that the assessment was not based on the Respondent's wrong interpretations of the VAT apportionment laws as well as the express provisions of the taxing Acts.

92. The Respondent further stated that the assessment was not erroneous in that the Respondent did not fail to appreciate the VAT of apportionment of common input and the assessment was not contrary to the Appellant's legitimate expectation and rules of fair treatment under the FAAA.

93. It stated that the Appellant failed to avail detailed supporting documentation, records and reconciliations to counter the assessments of the Respondent in the various engagements at assessment stage as well as objection stage contrary to Section 59 (1) of the TPA.

94. The Respondent further averred that the Appellant did not provide any evidence to show or demonstrate that the assessment was erroneous or excessive despite being given several opportunities to support its position. It also averred that the Appellant at the objection stage failed to avail the detailed supporting documentation and reconciliation to support its various objection grounds as per the requirements of Section 51(3) of the TPA.

95. The Respondent also filed written submissions wherein it submitted the assessment was justified. It submitted that there is a direct relationship between the amount of paper sacks and polybags used as an input and the quantities of tea produced, sold, delivered, dispatched or stocked in kgs or bags. On this understanding it conducted 3 tests:a.Processed tea versus dispatched tea;b.Packaging materials (paper sacks and Polly bags) versus dispatched tea; andc.Utilized pallets verses dispatched tea.

96. The Respondent submitted that the Appellant’s computation also indicates un explained positive and negative variances this indicate that the Appellant was also not able to reconcile his own computation of dispatches on made tea.

97. The Respondent also submitted that the Input-Output analysis is grounded in industry standards, quantitative consistency, inventory control practices, third-party validations, and established legal and accounting principles. Therefore, the Respondent’s applied assumption is not only reasonable but necessary for accurate and fair assessment.

98. The Respondent also submitted that tax issue for determination was therefore not the VAT treatment of export tea but verification of actual exports out of Kenya and a verification of the local vs export sales. Further it submitted that the Appellant failed to satisfy the Respondent that all the tea declared under exports was fully accounted for through both primary records and cross matching with KTDA records and payments.

99. The Respondent relied on the case of Digital Box Limited vs Commissioner of Investigation & Enforcement TAT Appeal No. 115 of 2017 to submit that the Respondent has a right use the available information to make a fair decision.

100. It also cited the case of Tile and Carpet Centre Limited v Commissioner of Domestic Taxes [2020] eKLR; Ushindi Exporters Limited V Commissioner of Investigations and Enforcement (Tat Appeal No. 7 of 2015; Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR; Prima Rosa Flowers Limited v Commissioner of Domestic Taxes [2019] eKLR; and Commissioner of Domestic Taxes v Metoxide Limited [2021] to submit that the taxpayer has a duty to prove that the Respondent’s decision is incorrect by adducing documents but the Appellant failed to discharge the burden.

101. The Respondent therefore, prayed for the Tribunal to find that the appeal is devoid of any merit and dismiss the same with costs and uphold the Respondent’s objection decision issued on 31st May 2024.

Issues for Determination 102. Having considered the parties’ pleadings and documentations, the Tribunal puts forth the following issues for determination:a.Whether the Appellant discharged its burden of proving that decision of the Respondent dated 31st May, 2024 was incorrect.b.Whether the Respondent erred in confirming the corporation Income tax, VAT and PAYE assessments.

Analysis and Findings 103. It is to these issues that the Tribunal will turn within as hereunder:a.Whether the Appellant discharged its burden of proving that decision of the Respondent dated 31st May, 2024 was incorrect.

104. The genesis of this dispute is the confirmation by the Respondent of its assessments on the Appellant for corporation income tax, VAT and PAYE on the basis that first, the Appellant under declared its sales; Secondly, that the Appellant’s direct sales overseas were subject to VAT and that thirdly the Appellant under declared PAYE charged on Director’s Christmas gift vouchers.

105. The Tribunal notes that the Respondent analysed the Appellant’s stock inventory and bank statements in concluding that the Appellant had under declared its sales.

106. The Tribunal notes that the Appellant, in its notice of objection dated 25th April, 2024 outlined in detail the production dispatch and sale process and concurred with the Respondent’s view of the standard operations in the tea industry. The Tribunal further notes that there was no dispute on the standard operational practice in the tea factories/ tea industry. More particularly because the Respondent stated as follows in its statement of facts:“in the tea industry, it is standard operational practice to package tea in specified quantities using standardized packaging materials such as paper sacks and polybags. Each unit of these materials corresponds to a specific volume or weight of tea. For instance, a paper sack is typically used to pack a fixed weight of tea, such as 20 kilograms. This standardization ensures consistency and efficiency in handling and transporting tea products.

107. The Respondent further stated as follows:“that the relationship between packaging materials and tea quantities is quantitatively consistent. It added that if a factory uses 1,000 paper sacks, and each sack holds 20 kilograms of tea, it is reasonable to infer that approximately 20,000 kilograms of tea were produced and packaged. This consistency forms a reliable basis for tracking and verifying production and inventory levels.”

108. The Tribunal notes that in spite of the fact that the parties agreed on the Standard procedures in the tea industry, the Appellant submitted that the Respondent assumed that there was a direct correlation between the use of paper sacks and polybags as inputs and the quantities of tea produced and distributed. It further stated that the Respondent conducted tests comparing processed tea versus dispatched tea, concluding that variances indicated unaccounted processed tea, implying omitted sales amounting to 1,253. 368 for the year 2018/2019. On the other hand, the Respondent maintained that there were discrepancies due to different quantities of dispatches to the Mombasa Tea Auction, and that the Appellant did not adduce documents that would have led to a different decision.

109. The Appellant opposed the Respondent’s findings on processed and dispatched products, the Appellant maintained that the discrepancies between processed and dispatched products do not necessarily indicate under-declaration of sales, as not all dispatched outputs equate to sales. The Tribunal noted that despite this assertion, the Appellant failed to specify the volume of sales and volume of dispatched outputs.

110. The Tribunal noted that whereas the Appellant stated that dispatches could be inferred from processed teas that are shipped from the factory either to the Mombasa warehouses, the purchaser's premises or to the factory door sales, the Appellant failed to recognise that it could not its case by making inferences. Instead, it was supposed to provide documentary evidence of dispatches to prove its case but it did not.

111. The Tribunal notes that the Respondent also demanded stock movement records to support the year-end stock sheets for packaging materials and pallets to explain the discrepancies that the Respondent identified in its audit but some of the documentation was not availed.

112. It should be recalled that section 23 (1) of the TPA provides as follows:“23. 23. Record-keeping

(1)A person shall—(a)maintain any document required under a tax law, in either of the official languages;(b)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law. ‘A person shall— maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained.”

113. The Appellant was opposed to the Respondent’s demand for its source dispatch records and proceeded to state as follows in its statement of facts:‘‘the Respondent's request for 100% documentation, the Appellant holds this as unreasonable, but if for accuracy and show of good faith, the taxpayer would be willing to provide a smaller sample that we determine would achieve the same objective.’’

114. Section 59 (1) of the TPA provides as follows:“59. Production of records(1)For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to—(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person….”

115. The Tribunal observes that the Respondent used an average in its computation of the Kilogrammes of Tea without factoring in the actual weighted average to wit the Appellant argued in stating that this action resulted in overstating the Kilogrammes of Tea. The Tribunal is of the view that in the absence of sufficient documentation, the Respondent had no alternative but to make its best judgement based on the available information pursuant to the following provisions of Section 31 (1) of the TPA:“31. Amendment of assessments(1)Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement,[Emphasis ours] to the original assessment of a taxpayer for a reporting period to ensure that....”

116. Further, Section 51(3) of the TPA mandates the taxpayer to produce documents in support of its notice of objection.

117. The Tribunal examined and reviewed the documentation provided by the Appellant and noted that it was a list of dispatches. However, the Tribunal notes that the Appellant did not adduce in evidence all the corresponding documents such as bank statements, sales records to explain the variances that the Respondent had identified. With regard to purchased packaging materials and dispatched products, the Appellant averred that variances between purchased packaging materials and dispatched products did not imply under-declaration of sales, since not all dispatched items are sold. The Respondent on the other hand asserted that there were variances between purchased packaging materials and dispatched products, The Appellant ought to have specified the quantities of sales and quantities of dispatched items and explain the disparities and it failed to do so.

118. The Tribunal notes the Appellant’s submission that it incurred inter-factory borrowing which the Respondent ought to have allowed pursuant to the provisions of Section 15(2)(a) of the ITA. The said section 15(2)(a) of the ITA provides as follows:‘‘(a) bad debts incurred in the production of such gains or profits which the Commissioner considers to have become bad, and doubtful debts so incurred to the extent that they are estimated to the satisfaction of the Commissioner to have become bad, during such year of income and the Commissioner may prescribe such guidelines as may be appropriate for the purposes of determining bad debts under this subparagraph.’’

119. The Appellant did not prove that the debts had become bad or doubtful. Therefore, the Appellant could not rely on section 15(2)(a) of the TPA. Simply put, the Appellant did not satisfy the provisions under Guidelines on Allowability of Bad Debts under Legal Notice number 37 of 2011.

120. With regard to VAT, the Tribunal notes that the dispute was around the issue of VAT on DSO. The Respondent was unable to determine whether all tea manufactured in the factory and classified in the DSO was fully exported because the documentation required for cross matching export data with factory records was not provided by the Appellant.

121. Paragraph 1 of the schedule of the VAT Act provides that exportation of goods is zero rated. paragraph 28 of the said schedule also provides that all tea and coffee locally purchased for the purpose of value addition before exportation is zero rated but subject to approval by the Commissioner-General.

122. The Tribunal examined the agreement between the Appellant and KTDA dated 2nd March 2009 alongside the deed of variation of management dated 26th October 2015. The Tribunal noted that the term of the agreement was for ten year effective from 2nd March 2009.

123. The Tribunal notes the Appellant’s admission that it did not have evidence to support its claim of export of tea. If the Appellant was exporting tea on its own, it would still be required to produce documents to prove that it exported tea. The Appellant would still be required to provide documents to support the position that it exported zero-rated goods. Section 43 of the VAT Act provides as follows:‘‘43. Keeping of records1. A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept for a period of five years from the date of the last entry made therein.’’

124. In Silver Chain Limited v Commissioner Income Tax & 3 others [2016] KEHC 1538 (KLR) the Court held as follows in relation to section 43 of the VAT Act:‘‘The above section elaborates the specific records to be kept under section 43 (2). Such records include tax invoices, credit and debit notes, purchase invoices, custom entries, receipts for customs duty tax among other documents.’’

125. The Tribunal notes that the Respondent charged income tax - PAYE amounting to Kshs 322,275. 00 on the basis that the Appellant paid Christmas gift vouchers for the period under review. The Respondent noted that PAYE on Christmas vouchers paid to the Board of directors was not remitted to the Respondent for the period under review therefore, brought it to charge since the Appellant did not file evidentiary documentation to prove its case.

126. The Appellant did not file any evidence to oppose the Respondent’s assessment. Section 54A of the ITA provides for keeping of records of receipts, expenses, etc. it provides as follows:‘‘(1) A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.’’

127. The Court in Commissioner of Domestic Taxes v Econobuild Limited (Income Tax Appeal E119 of 2021) [2024] KEHC 7708 (KLR) (Commercial and Tax) (27 June 2024) (Judgment) held as follows:‘‘According to Section 56 of the TPA, the burden to prove that a tax decision is incorrect is on the tax payer. Similarly, Section 30 of the Tax Appeals Tribunal Act provides that: “In a proceeding before the Tribunal, the appellant has the burden of proving where an appeal relates to an assessment, that the assessment is excessive.”

128. In Ingala Building and Construction Limitedv Commissioner of Domestic Taxes (Income Tax Appeal E094 of 2023) [2024] KEHC 7675 (KLR) (Commercial and Tax) (27 June 2024) (Judgment), the Court held as follows:‘’25 In this case, I agree with the tribunal’s finding that although the appellant provided the relevant records as requested, it was incumbent upon it to prove through those documents that the respondent’s assessment was incorrect.26. Although the appellant provided documents and the respondent reviewed them before partially accepting/rejecting the appellant’s objection notice, it did not specify the particulars of the said documents and issues omitted or not considered by the respondent so as to prove that the respondent was incorrect. Further, the appellant had the opportunity to prove this before the tribunal and also in this appeal but has failed to do so.27. I find that the appellant has failed to discharge its burden of proof as stipulated under Section 56(1) of the Tax Procedures Act.’’

129. Consequently, the Tribunal finds that the Appellant failed to discharge its burden of proving that the decision of the Respondent dated 31st May, 2024 was incorrect.

(b) Whether the Respondent erred in confirming the corporation Income tax, VAT and PAYE assessments. 130. The Tribunal having determined that the Appellant failed to discharge its burden of proving that the Respondent’s confirmed assessment was incorrect or ought to have been made differently finds, that the Respondent did not err in confirming the corporation Income tax, VAT and PAYE assessments.

Final Decision 131. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is not meritorious and makes the following Orders:thea.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 31st May 2024 be and is hereby upheld.c.Each party to bear its own cost.

132. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 2ND DAY OF MAY, 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER