[2024] KETAT 1441 (KLR)

M-Kopa Kenya Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E735 of 2023) [2024] KETAT 1441 (KLR) (Civ) (4 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1441 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E735 of 2023

RM Mutuma, Chair, M Makau, EN Njeru, B Gitari & AM Diriye, Members

October 4, 2024

Between

M-Kopa Kenya Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

1. The Appellant is a Private Limited Liability Company incorporated in Kenya under the Companies Act as a subsidiary of M-Kopa LLC, a Company incorporated in the United States of America with the parent company, M-Kopa Holdings Limited being incorporated in the United Kingdom. Its main form of business is in retailing of solar powered home lighting solutions, mobile phones and other related products.

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

3. The Respondent conducted a compliance analysis on the Appellant’s operations for the period 2017 to 2020 and found that Corporation Income Tax were to be adjusted and Withholding Tax was owing. Subsequently, the Respondent issued additional assessments through a letter dated 19th June 2023.

4. The Appellant lodged a late Objection vide a letter dated 19th July 2023, which was received on 27th July 2023 against the assessments. Upon further communication and meetings between the parties, the Respondent issued an Objection Decision vide a letter dated 14th September 2023.

5. Aggrieved by the Respondent’s decision, the Appellant lodged the Appeal vide the Notice of Appeal dated and filed on 13th October 2023.

The Appeal 6. The Appeal is premised on the following grounds listed in the Memorandum of Appeal dated and filed on 27th October 2023 and set out the following grounds of appeal, that;a.The Respondent erred in fact and law by failing to consider the Appellant’s explanations and supporting documentation, thus disallowing genuine business expenses, which were wholly and exclusively incurred in furtherance of business.b.The Respondent erred by disallowing bad debts written off, of Kshs. 223,017,123. 00, Kshs. 346,425,076. 00 and Kshs. 627,138,249. 00 for the 2017, 2018 and 2019 years of income against the provisions of Section 15 (2) (a) of the Income Tax Act of Kenya (“ITA”) and the Commissioner’s Guidelines under Legal Notice 37 of 2011. c.The Respondent erred in deeming a dividend on the adjustment for the low-value add services provided by the Appellant to the group entities and assessing WHT of Kshs. 17,069,768. 00.

The Appellant’s Case 7. The Appellant’s Appeal is premised on its;a.Statement of Facts dated and filed on 27th October 2023 together with the documents attached thereto; and,b.Written submissions dated and filed on 5th March 2024.

i. Bad Debts Written off 8. The Appellant averred that it sells its products to customers on credit on a Pay-As-You-Go basis where the customers pays a small deposit averaging Kshs. 3,500. 00 after which they are given the products. In order for the customers to enjoy the use of the products they make average daily payments of Kshs. 50. 00 over a period of one to two years after which their products are fully paid for and upon which well paying customers may continue to receive offers for additional products and services from the Appellant. Solar products which were the primary products being sold by the Appellant during the period in question, are mainly targeted at low-income households in rural areas that offer a clean and renewable energy alternative. This explains the low quantum of deposit and daily payment amounts that the Appellant’s customers made.

9. The Appellant stated that unlike conventional financial institutions, it tracks delinquency based on zero credit days consecutive thus, bad debts write off happens based on this criterion as opposed to cumulative days in arrears which is the norm with financial services.

10. The Appellant stated that its method of write offs is therefore much more conservative as these customers are definitely more than 120 days in arrears cumulatively.

11. According to the Appellant, it offers incentives for customers to cancel, return their devices and receive a full refund on their deposit. Further, the Appellant also offers incentives for customers who maintain good repayment terms by giving them an opportunity to acquire additional products at a discounted price. In addition to the incentives offered, the Appellant has a dedicated collections team that is solely focused on contacting delinquent customers. The conversion rate for customers who have not paid in more than 120 days is less than 10% of the outstanding loan book while in other delinquency buckets (below 120 days) conversion rate is above 70%. The cost implications far outweigh the benefits accrued as the cost is on a fixed wage as opposed to a variable which is the norm in all other delinquency buckets (below 120 days).

12. The Appellant avowed that its customers are spread across the whole country. Sales to the customers are made through Direct Sales Representatives (‘DSRs’) who are located in areas close to the customers. Though the DSRs are located close to the customers, the Appellant avers that the primarily role of the DSRs is to sell the Appellant’s products and that of the field technicians is to install and troubleshoot primarily for solar customers in case of malfunctions and not to collect debts. The Appellant stated that if the DSRs and field technicians are deployed to also follow up on the debts this would be at an added cost in terms of (a) remunerating them for this additional role; (b) forcing the Appellant to hire more staff or sales agents at additional costs to follow up on the debts; and (c) potentially realizing less sales due to added responsibilities on sales agents. According to the Appellant, this would also pose a significant potential risk with respect to consumer protection principles which the Appellant subscribes to as generally speaking, collections agents should have the requisite training and experience prior to undertaking such tasks.

13. Contrary to Respondent’s assertion that the Appellant’s solar kit is fitted with a Safaricom SIM card that has a GSM communication module which allows the Appellant to trace the location of each customer the Appellant contends that the Appellant can only get a rough location of the customer devices of between 10 to 30 kilometres from the tower location. This is because the customer devices do not have full GPS. The sim cards in the customer devices are primarily used for connectivity (usage telemetry) and to deliver credit to devices and not for locating the customers.

14. Further, there are significant data privacy concerns at play including under the Kenya Data Privacy Act, 2019 as generally speaking personal data such as Global Positioning System (“GPS”) location data should not be re-purposed without getting explicit customer consent or pursuant to another lawful basis and provided further that additional training would be required prior to any such individuals handling customer personal data, which would also increase the Appellant’s costs of recovering the bad debts.

15. The Appellant contended that in addition to its bad debt provisioning policy, it undertook the following steps to pursue the bad debts:a.The credit advanced to customers is closely monitored. All M-Kopa Kenya customers received two calls: first, for Loan activation calls involving screening call to confirm customer consent and validate the details provided for the loan, confirm that the customer understands the terms and conditions of the loan; and second, education calls - these were 3 calls spread out within the first 30 days going into details on the terms and conditions of the loan, how to maximize the benefits of the product, customer care contact in case they needed to reach the Appellant.b.After 1 month of owning the product, the customer was followed up based on zero credits.c.Between 1 - 4 days — Customers received payment reminder SMS that are auto generated. Non-cures (no payment made within the self-cure window) at this stage were flagged to receive a call under the below campaign buckets:i.5 - 30 days without credit: The minimum credit a customer could purchase is one credit equivalent to their daily cost of credit, and this was counted as a cure because it reset their days on zero credit and they got usage days on their device. At this stage the Appellant pitched for bulk credit purchase which encouraged early loan repayment which is discounted. Retaining good credit history qualified customers for other products by the Appellant.ii.31 - 90 days: Customers who got to 31 days + on zero credit, were blocked and they would require seven credits to reactivate their account. Customers in this segment were allocated to collection agents on rotational basis each rotation lasting for 10 days. The agents were tasked to contact, either through-calls or SMS and follow up with these customers to encourage payment.iii.90 - 120 days: Customers who got to 91 + days with zero credit would receive SMS communication every alternate day within the 30 days to communicate either on loan payment or product return before they are listed negatively with Credit Reference Bureaus.iv.120 days: For customers who got to 121 + days with zero credit they would be written off as all internal efforts had not yielded any repayment from the customer.d.For struggling customers, the Appellant allowed them to return the product, if it was in good working condition, the Appellant refunded full deposit, and for any missing component, the Appellant deducted the replacement value from the deposit and refunded the balance.

16. It stated that based on the above, all reasonable steps were taken to collect the bad debts written off and recover the devices from the defaulting customers. The Appellant maintained that it would be difficult to repossess the devices unless the customer returns the devices due to the following challenges:a.The DSRs and field technicians do not know the exact location of the customers who have defaulted. A DSR or field technician who may have sold or installed hundreds of products would not remember the location of the few customers who default.b.The devices are fitted with Safaricom SIM cards that have a GSM communication module which can help locate the customers. However, the GSM communication module only gives a rough estimate of the location of between 10 to 30 kilometres because the customer devices do not have full GPS. As a result, the Appellant would have to employ more resources including time, travel allowances, airtime allowances to locate the customer, not to mention the serious data privacy concerns that would need to be addressed prior to employing such a method.c.The defaulting customers are highly uncooperative, and they usually do not respond to phone calls from the customer care agents trying to collect the debt from them and therefore they would not help you locate them.

17. The Appellant contended that the debts written off are uncollectible since no form of security or collateral is realisable whether partially or in full. It also stated that the Respondent erred in noting that customers who got 120+ days with zero credit were only blocked and no longer received SMS communication but the devices were not repossessed which negates the argument that no security is realisable. According to the Appellant, this is incorrect for the following reasons:i.Once the SIM card connected to the device is disconnected, the device is no longer functional and cannot be used by the customer;ii.The defaulting customers are highly uncooperative and they usually do not respond to phone calls from the customer care agents and therefore, trying to fetch the devices from them would not be possible; and,iii.Even where a deactivated device is returned, the device can only be broken down to parts.

18. The Appellant averred that customers who defaulted on their payments were reported for listing with the Credit Reference Bureau (“CRB”) in the years under review only listing a customer with the CRB after a lengthy notification process warning the customer of the negative effects of getting listed with the CRB to ensure that the customers make payments. It added that the fact that the customers were still in the CRB listing in 2017 and beyond despite repeated warnings from the Appellant demonstrates that all available opportunities to recover the bad debts were exhausted.

19. It reiterated that only when a customer resumes his/her payments would they be delisted or else their details remain with CRB from the date of listing and therefore, the Respondent has erred in asserting that the Appellant has not demonstrated that the written off customers are pursued further except for listing with CRB while the guidelines require the debtor to be deemed insolvent by a court of law.

20. The Appellant contended that that listing with CRB was its last resort on the premise that once the defaulting customers are listed and their credit score is severed thereby making them ineligible to access any form of credit facility, they will be compelled to settle the outstanding amounts with the Appellant to be delisted. It added that the process of deeming the debtor’s insolvent is a different process, as provided by Legal Notice 37 of 2011 and which is not the ground the Appellant relies on.

21. It stated that if it had chosen to take the defaulting customers to court to have them declared insolvent, the costs and efforts involved in the litigation process would outweigh the amounts outstanding, taking into consideration the number of customers and the quantum of the debt owed by each customer.

22. In addition to the above, the Appellant asserted that the bad debts written off under consideration are specific debts and are not general in nature. The Appellant maintained that there is a detailed listing of the bad debts written off for the customers. The specific nature of these bad debts and the fact that there is no form of security or collateral realisable and that the costs of recovering the debt exceed the value of the debt, are the reasons the Appellant rightfully allowed their write off in the 2017, 2018 and 2019 years of income and the fact that there exists a listing provided to CRB and there are call and SMS logs showing the follow up efforts, further demonstrates that a detailed listing of all the customers exists.

23. The Appellant further asserted that its basis for allowing the bad debts written off in 2017, 2018, and 2019 is that the cost of pursuing the debts outweighs the value of the debts due to the logistical challenges that would be faced in locating every defaulting customer.

24. It reiterated that it separately engaged a third party to quantify the costs that would be incurred in recovering the debts as adduced in the report on quantification of costs and there was no form of security or collateral to be realised at all from the customers.

25. The Appellant stated that the cost of pursuing the debt using third party agents would exceed the cost of recovering the debt given that only 3% of the customers default and the debt would be written off. Furthermore, these customers are spread across the country, hence difficult to trace them.

26. It contended that in estimating the cost that would be incurred in collecting the bad debts incurred in 2017, 2018, 2019 years of income, it is guided by the standard costs that would be incurred in the process of following up on the debtors for recovery purposes whether through an out of court settlement or through a litigation process.

27. The Appellant argued that it considered the following in determining how much it would cost in pursuing a customer’s debt, which on average was Kshs. 6,630. 00 with a maximum of Kshs. 37,000. 00:a.Customer tracing costs - The expected costs of contracting a third-party investigator to trace each customer would be at least Kshs. 20,000. 00 per customer. This sum would account for costs such as investigator’s fees, travel expenses and accommodation costs;b.If the aforementioned recovery efforts were unsuccessful, the Appellant would be expected to instruct an advocate to undertake debt recovery proceedings. The Advocate’s costs in the debt recovery proceedings would be guided by the minimum fees per Schedule 5 of the Advocates Remuneration Order, 2014. The process would culminate either in an out of court settlement or a litigation process and the minimum costs for each process would be as follows:i.Recovery costs through an out of court settlement – Kshs. 37,260. 00; and,ii.Recovery costs through a litigation process – Kshs. 109,640. 00. 1.It maintained that the costs of recovering the bad debts outweigh the value of the debts per customer and subsequently, the Appellant made the decision to write off the bad debts in the 2017, 2018 and 2019 years of income.2. The Appellant noted that its solar devices have a modem with a Safaricom SIM card in them that communicates with the Appellant’s servers via 2G data network by picking information about payments, which is translated into the number of days of usage that the solar devices should ‘power on’ for.3. It averred that the modem has some intelligence that will cause a periodic check-in once every 24 hours. The device’s battery will need sufficient charge, and to be in a good Safaricom network, for the check-in to work and when the modem checks in, the SIM card will be active for a short time, generally less than 2 minutes. The SIM card is otherwise inactive, for devices that the customer is not paying for, the customer will not be using it which causes the battery to be flat and hence the SIM card will not check-in.4. The Appellant added that if the customer presses the “M-KOPA Credit” button on the device, the modem will be switched and check-in too. In this instance the SIM card is only active for a short period, less than 2 minutes to receive the credit.5. It maintained that the modem is not equipped with any location information and the time the SIM card is active is not sufficient for Safaricom to be able to triangulate the position. It added that even if the SIM card was active to allow triangulation, it would only give a rough location of the customer devices between 10 to 30 kilometres radius from the Safaricom tower location because they do not have full GPS as the SIM cards are primarily used for connectivity and to deliver customer payments, translated into number of usage days.6. The Appellant averred that any repairs or replacements of customer devices are only done at the service centres or the Appellant’s shops and the DSRS also market its products either from the service centres, its shops or by moving around looking for customers in their different regions. It is therefore not possible to tell where the customers are physically located by the DSRs.7. It stated that in the instances where the customers return the devices, it only uses these returned devices to provide parts to be used for refurbishment purposes. Therefore, there is no significant recovery of the debts from repossession of devices.8. The Appellant relied on the case of Equity Bank Kenya Limited vs. Commissioner of Domestic Taxes 2021 and averred that in order to benefit from tax deduction on account of bad debts the taxpayer needs only to establish one of the grounds set out in paragraph 2 of the Guidelines. It further contended that it satisfied at least TWO grounds in arriving at the decision to write off the bad debts and has demonstrated that the cost of recovering the bad debts written off is greater than the debts and that no form of security or collateral is realisable whether partially or in full. It also relied on the case of Soma Properties Limited v HAYM [2015] where the court stated that;“reasonable and reasonably ... is a standard measured against the care to be exercised by a reasonably prudent person in all circumstances including the practice and usages prevailing in the community and the common understanding of what is practicable and what is to be expected. The standard of reasonableness is not one of perfection.”

ii. Services to related parties 36. With regard to this aspect, the Appellant stated that the Respondent made a total income adjustment of Kshs. 172,285,538. 00 for the 2017, 2018, 2019 and 2020 years of income for services that Appellant provided to related parties by virtue of most departmental heads being located in Kenya.

37. The Appellant averred that at the very onset, services the senior management were providing support to the other M-KOPA Group entities had continually declined over the period as these entities continually invested in in-house management teams and that only provided support services to the other group entities when they were in their nascent stages and the level of involvement by the Appellant has gradually reduced over time.

38. The Appellant averred that it has since scaled down providing the support services to non-resident related parties since these entities are now fully-fledged and autonomous in their day to day Operations and management oversight.

39. It is the Appellant’s a position that the Respondent erred by assuming that the level of support provided by the Appellant to the group entities has remained the same over the years, albeit without any documentary evidence or proof and apportion costs incurred by the management staff to the group entities.

40. It contended that the Respondent’s attribution of various costs to the Appellant blowing services to the other group entities is erroneous because the Directors remuneration is determined for each company and overall based on the performance of the company as an individual may be a director of several companies drawing director’s fees in some entities and not others. Therefore, the director remuneration by the ‘Directors cannot be construed to be at tribulation for services to other Groups.

41. It contended that the level of service provision by the Appellant to the other Group entities has continually dwindled over the period Consequently the costs that may be attributable to the service provision have also gone down over the period, which has not been reflected in the Respondent’s workings in a worst-case scenario.

42. The Appellant reiterated that the Respondent packed the full cost attributable to international travel without due consideration as to whether these were all related to the group entities activities. It maintained that the Respondent erred in marking up international travel, air ticket accommodation, meals and per diem and other expenses costs which is against the general principle provided by the Organization for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines. These costs are merely pass through costs with no value add, and where charged to a related party under arm’s length considerations and if these costs were to be recharged in the first place, they should be recharged at cost and with no mark-up.

Withholding Tax i. Deemed Dividend 43. With regard to this aspect, the Appellant stated that the Respondent deemed a dividend of Kshs. 96,641,331. 00 in 2018 2018 and 2020 in line with Section 7 (1) (b) of the ITA and issued a WHT assessment of Kshs. 16,737,182. 00 with the deemed dividend being a result of the Transfer Pricing adjustment relating to provision of low value services by the Appellant to its non-resident related parties.

44. The Appellant cited Section 3 (2) (b) and Section 7 (1) (b) of the ITA together with the case of TAT 304 of 2019 Pevans East Africa Limited vs. Commissioner of Domestic Taxes (2019) and contended that the Respondent erred in fact and law in demanding WHT on deemed dividend from the Appellant for the 2018 and 2019 years of income.

45. In further support of the Appeal, the Appellant, in its written submissions identified the following issues for determination.i.Whether the Respondent erred by disallowing bad debts written off amounting to Kshs. 223,017,123. 00, Kshs. 346,425,076. 00 and Kshs. 627,138,249. 00 in the 2017, 2018 and 2020 years of income respectively against the provisions of Section 15 (2) (a) of the Income Tax Act (ITA) and the Commissioner’s Guidelines under Legal Notice 37 of 2011;ii.Whether the Respondent erred in assessing CIT on the related party services provided by the Appellant to M-KOPA Group entities; and,iii.Whether the Respondent erred in assessing withholding income tax on the deemed dividend that arose from TP adjustments.

46. The Tribunal carefully examined the Appellant’s written submissions and notes that the Appellant reproduced its Statement of Facts verbatim in its submissions. Therefore, the Tribunal will not dwell on the same having been adequately addressed.

The Appellant’s prayers 47. The Appellant made the following prayers to the Tribunal that;a.The Respondent’s Objection Decision contained in the letter dated 14th September 2023 adjusting the 2017, 2018, 2019 and 2020 Corporation Tax loss position downwards by Kshs. 1,368,865,986. 00 and WHT assessment of Kshs. 17,069,768. 00 set aside in its entirety;b.The Appeal be allowed; andc.Any other remedies that the Honourable Tribunal deems just and reasonable.

The Respondent’s Case 48. The Respondent’s case is premised on its;a.Statement of Facts dated 28th November 2023 and filed on 30th November 2023 together with the documents attached thereto; and,b.Written submissions dated 8th March 2024 and filed on 12th March 2024.

49. In response to the Memorandum of Appeal, the Respondent stated that the Appellant did not fulfil the requirements under the guidelines stipulated in the Legal Notice no. 37 under subsidiary legislation to the Income Tax Act. The Respondent asserted that for the claim governed by Legal Notice 37 to be valid, the Appellant should meet the thresholds required as summarised below:i.The creditor loss of contractual right that comprises the debt through a court order: There was no evidence that the Appellant lost contractual right to the property.ii.No form of security or collateral is realisable whether partially or in full: Whereas the Appellant alluded to this possibility, there were no transaction documents showing the affected items, the customers involved, the valuation details for the repossessed items as well as proof of the amounts realised from the specific items subsequently resold.iii.The securities or collateral have been realised but the proceeds fail to cover the entire debt: there were no transaction documents showing the affected items, the customers involved, the valuation details for the repossessed items as well as proof of the amounts realised from the specific items subsequently resold.iv.The debtor is adjudged insolvent or bankrupt by a court of law; There was no evidence that debtor had been adjudged Bankrupt.v.The costs of recovering the debt exceeds the debt itself: Whereas the Appellant alluded to this possibility, transaction documents for the claimed amount have not been availed to support this contention.vi.Efforts to collect the debt are abandoned for another reasonable cause: There was no evidence that they abandoned recovery efforts for another cause.

50. It averred that the Appellant on their own admission met only two requirements as stated in Appellant’s letter of objection and it requested the following transaction documents for the amounts in contention and clear progression on what might have changed leading to the write-offs:a.Sales contracts for the affected customers complete with revenue recognition for the period.b.Detailed customer statements and evidence of payments received.c.Correspondences with the customers and auctioneers in the distress for defaulted payments. (See KRA 3 of the Respondent’s Statement of Facts for a copy of the said email communication).

51. The Respondent averred that the information requested would have aided in authenticating the bad debt written off by having a clear understanding of the sale transactions and clear progression of what changed leading to the debt write off but the Appellant failed to avail the same for review.

52. It contended that contrary to the Appellant's allegations that it was not possible to trace the Appellant’s clients through the Direct Sales Representatives (DSR) and the technical personnel, the Appellant makes all its sales on credit whereby customers make a deposit of a small amount and thereafter purchase the product through daily payments for a period of one year and upon completion of the payments, the customers own the products and can upgrade to more products.

53. It averred that the Appellant’s products are connected to the “control unit” which has an inbuilt software that enables remote monitoring and allows deactivation of the system whenever a customer defaults on the daily payment and the control unit is configured in such a way that it cannot discharge power in the event the customer defaults payments and therefore, the device is rendered redundant. It further asserted that the solar kit is fitted with a Safaricom Sim Card that allows monitoring of payments and communication with the company’s database.

54. The Respondent stated that the Appellant makes a provision for bad debts in case a customer defaults on daily payments and if the accumulated non-payment period reaches 120 days, the Appellant writes off the debt as bad debt. It averred that the Appellant wrote off bad debts in years 2017-2020 amounting to Kshs. 1,984,671,433. 00 for expected credit loss provision for 1,521,680,325, provision for bad and doubtful debts for Kshs. 65,642,016. 00, IFRS uplift (Expected credit loss provision) for 397,349, which were expensed based on the reasons that the customers are widely spread across the country and thus it would be logistically impossible to deploy personnel to pursue the debts hence the cost of recovering the debts exceeds the debt itself; and no form of security or collateral is realisable whether partially or in full.

55. It contended that for the year ended 2020, the Appellant added back the amount claimed of Kshs. 788,090,985. 00 in the tax computation as a non-deductible expense, but the amounts for the other years were not added back.

56. The Respondent cited Section 15 (2) of the Income Tax Act and stated that the Appellant was required to satisfy the Respondent that the debts owed had become irrecoverable as provided for by the guidelines under Legal Notice 37 of 2011 and whereas the Appellant quoted two reasons under paragraph two of the above guidelines, the Appellant did not demonstrate that all reasonable steps were taken to collect the debt as required.

57. It added that the Appellant sells its products mainly through Direct Sales Representatives (DSRs) who are located closer to the customer and therefore can act as a link in case a customer needs to be traced and that the Appellant also has field technicians who assist in the installation of the products and assist the customers in case a product malfunction.

58. It contended that in the collaboration agreement between the Appellant and Safaricom, Safaricom was required to Provide M-Kopa with location information as to which base transceiver station is serving the M-Kopa system. It explained that the base transceiver station provides the location of a GSM device based on the location of the cell tower that is closest to the GSM device emitting the radio signal.

59. According to the Respondent, the contract between the Appellant and its customers’ states that;“M-Kopa retains ongoing ownership of the GSM communication module and reserves the right to reactivate the module and billing for additional products and, each customer undertakes/agrees that.....any tampering and/or modification of the GSM communication module shall constitute wilful destruction of M-Kopa’s property and may result in criminal charges being brought against the customer and such other civil actions by M-Kopa regardless of whether the total price has been paid.”

60. It averred that the GSM communication module is what provides the location of the customer and the Appellant has not demonstrated any efforts to recover the bad debts nor recover the products from the customers save for the alleged phone calls and CRB listing.

61. The Respondent maintained that from the foregoing, it is clear that at any one time, the Appellant was able to trace the location of all its customers and the actions of the Appellant in disallowing its bad debts by adding them back in the year 2020 was an acknowledgement by the Appellant that the bad debts were not allowable.

62. The Respondent reiterated that it did not err in disallowing the bad debts amounting to Kshs. 1,196,580,448. 00 claimed in the years 2017 - 2019.

63. It cited Section 15 (4) of the Income Tax Act, 2015 and averred that the same section was amended by the 2015 Finance Act, which substituted the words four years with the words nine years effective 1st January 2016 but did not amend Section 15 (4) (iv) to allow losses incurred by a person as at 1st January 2016 to be treated as losses for that year.

64. The Respondent contended that losses incurred before 1st January 2016 were subject to the five-year rule on loss carry forward and thus it disallowed the losses that were incurred in years 2013, 2014 and 2015 and made the adjusted of losses carried forward of Kshs. 74,892,941. 00; Kshs. 73,450,302. 00; and Kshs. 268,191,813. 00 respectively.

65. It asserted that the Corporation Tax adjustments carried forward arising from the issues discussed were presented as Kshs. 2,443,398; 2,328,315; 1,164,102; and 766,213 for the years 2017, 2018, 2019, and 2020 respectively.

66. The Respondent stated that the Appellant failed to provide the documents requested and only provided an ageing listing without adequate information to allow the Respondent authenticate the debts. The Respondent reiterated that the Appellant failed to support the bad debts written off with information requested especially on transaction details, customers involved and efforts to collect.

67. The Respondent averred that it reviewed the structure of the M-Kopa group structure and established that most of the departmental heads are located in Kenya including the M-Kopa Group Chief Executive Officer, Mr Jesse Moore with the positions titled in the group structure as “senior management team: C-level, country MD’s and Directors”.

68. It contended that the Appellant is required under the FMO, CDC and Norfund syndicated loan agreement at “schedule 21” to provide a “Development Effects” report for each year and in each of the reports for the period 2018 to 2020, it noted the following with respect to total number of employees and senior managers;a.In 2017, the total number of full-time employees in Kenya was 589 and senior managers were 13 whereas the total number of full-time employees in other countries were 233 with 1 senior manager making it a total number of 822 full time employees and 1 senior manager.b.In 2018, the total number of full-time employees in Kenya was 618 and senior managers were 15 whereas the total number of full-time employees in other countries were 237 with 8 senior managers.c.It did not provide the information for the full-time employees and managers both in Kenya and other countries for 2020.

69. It averred that the senior managers were described in the development effects report as “Permanent employees in leading positions, setting strategic goals and making decisions on M-Kopa operations” and the Respondent established that majority of the senior managers were resident in Kenya and were therefore providing services to other M-Kopa group entities from Kenya.

70. It stated that the management support services were neither benchmarked in the transfer pricing policy to depict the arm’s length principle nor reported any income in relation to these services as required under Section 18 (3) of the Income Tax Act.

71. The Respondent averred that the arm's length principle has been elaborated by Organization for Economic Corporation and Development Transfer Pricing Guidelines (OECD TPG), which are considered the international best practice. It relied on Paragraph 7. 5 of the OECD TPG 2017 and stated that the OECD TPG has provided a guideline on the treatment of intra-group services and in particular, Chapter 7 of the OECD TPG requires that in order to establish whether or not payment for a service is at arm’s length, a two-step approach should be adopted. First, it must be determined whether a service has been rendered. Secondly, it must be determined if the charge for such service is at arm’s length.

72. The Respondent stated that a further review of the minutes of the meetings of directors of M-Kopa Holdings Limited, it noted that the ‘management’ of M-Kopa group was responsible for the group performance and would report on various initiatives being undertaken to the board.

73. It contended that the minutes defined ‘management’ as “one or more of Messrs Moore and Hughes and other members of management in their capacities as officers of the Company rather than as members of the Board (and may also include references to other members of Management present during such discussion).”

74. It maintained that it also noted that all directors and other senior managers of M-Kopa Kenya Limited were all senior managers of M-Kopa Holdings Limited as depicted in the group structure. Therefore, the other entities of M-Kopa group derived economic and commercial benefit from services provided by senior managers who were resident in Kenya.

75. The Respondent averred that for purposes of determining the arm's length value, it adopted the simplified approach as outlined under paragraph 7. 61 of the OECD TPG and applied a mark-up on costs at a rate of 5%.

76. It contended that the cost base is the salaries of all senior management and directors as highlighted in note 20 to the 2020 audited financial statements (AFS) and note 17 to the 2017 AFS, and the international travel costs and it also used revenue as the allocation key to determine costs attributable to other M-Kopa group entities.

77. The Respondent averred that the resultant income adjustment was Kshs. 172,285,538. 00 with Kshs. 75,644. 00, 2017 adjusted in 2017; Kshs. 33,176,422. 00 in 2018, Kshs. 35,023,867. 00 in 2019; and Kshs. 28,441,043. 00 in 2020. It cited Section 7 (1) (b) of the Income Tax Act and stated that the transfer pricing adjustment is a deemed dividend paid by M-Kopa Kenya Limited. The corresponding tax liability is Kshs. 16,737,182. 00 with Kshs. 5,440,934. 00 in 2018; 5,323,628. 00 in 2019; Kshs. 5,972,620. 00 in 2020.

78. The Respondent contended that during the review process it established that the Kenyan office hosts employees with regional and global roles. It further contended that other associated enterprises do not compensate the Kenyan entity in any way meaning entire expenses are recognized in Kenya while corresponding income is declared elsewhere. This in essence contravenes the matching principle. In this regard, the Respondent disallowed common costs on the basis of annual turnover from related parties as availed by the Appellant.

79. The Respondent averred that the disallowed expenses were not wholly & exclusively incurred in the production of income declared in Kenya and as per Global practice, a mark-up of 5% is considered as arm’s-length as the cost pool relating to shared services has been identified.

80. The Respondent maintained that the Appellant was yet to firm up the billing formula for these services and allow ability against local sales as of the time of this suit. It added that for an expense to be allowed, it must be incurred wholly and exclusively in production of income for that period.

81. The Respondent maintained that the supporting documents presented by the Appellant have been presented before the Tribunal in the first instance as the same were neither provided during objection nor when the Respondent requested for the same.

82. It reiterated that the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence.

83. In further opposition to the Appeal, the Respondent in its written submissions wherein it identified two issues for determination: First, whether the Respondent erred in disallowing the Appellant's bad debts of Kshs. 1,368,865,986. 00 for the year of income 2017 to 2019 and second, whether the Appellant discharged its burden of proof.

84. Apart from the averments in the Statement of Facts which are reproduced in the Respondent’s submissions, the Respondent cited a number of case laws in support of its case.

85. On the issue of bad and doubtful debt as a deduction for tax purposes, the Respondent cited the case of I & M Bank Kenya Ltd vs. Commissioner of Domestic Taxes (TAT 72 of 2017) in which this Tribunal held that;“In the Tribunal's view, Section 15 (2) allows doubtful debts to be deductible only to the extent that they are estimated to the satisfaction of the Commissioner to have become bad. For doubtful debts to be allowable, they must therefore be deemed to have become bad by the Commissioner, i.e. uncollectible.The Act therefore, considers bad and doubtful to be one and the same. Thus, it is the Tribunal's view that the Commissioner’s Guidelines applies in so far as determining whether or not a doubtful debt can be deemed to be uncollectible.On the basis of the foregoing, the Tribunal has taken into account the Commissioner's Guidelines in determining whether the various provisions made by the Appellant are allowable for deduction or not...”

86. The Respondent also relied on the case of Commissioner of Domestic Taxes v Kenya Maltings Limited [2013] eKLR where it was stated as follows:“The import of the Legal Notice No 37 of 2011 is that the Commissioner of Income Tax must be satisfied that that all efforts have been made to collect a debt. He must be convinced that the same has become uncollectable for him to declare it a bad debt. In addition to that, a bad debt becomes a deductible expense only if it is wholly and exclusively incurred in the normal course of business.”

87. The Respondent also cited the case of Republic v Commissioner for Income Tax & Another Ex Parte Stockman Rozen Kenya Limited eKLR [2015] wherein the court stated that:“It is dear from the foregoing provision that the decision as to which of the gains or profits that have become bad and doubtful debts so as to be deducted in computing for a year of income the gains or profits chargeable to tax under section 3 (2) (a) is purely the discretion of the Commissioner.”

88. The Respondent submitted that the Appellant did not demonstrate that the debts had become uncollectable and relied on the case of R. v TheRegistrar of Trademarks exp Sony Holdings Ltd & Anor. Misc. Appl. No. 165 of 2012 where the court while citing Black’s Law Dictionary 8th Ed. P432, submitted that;‘‘for a debt to be considered bad, it must be uncollectable and hence a doubtful debt not proven to be uncollectible is not a bad debt.’’

89. Finally, the Respondent also cited Section 56 (1) of the Tax Procedures Act and the case of Ushindi Exporters Limited vs. Commissioner of Investigations and Enforcement (Tax Appeals Tribunal No. 7 of 2015) and argued that the Appellant did not fully discharge its burden of proof in proving that the Respondent's decision to adjust the Corporation Tax upwards was incorrect as it did not adduce sufficient evidence therefore, the Appellant failed to conclusively show that the deductions they claimed ought to have been allowed.

The Respondent’s Prayers 90. The Respondent called upon the Honourable Tribunal to find that;a.The Appellant’s Appeal be dismissed with costs;b.The Additional Tax Assessments raised by the Respondent be confirmed and the principal taxes, interests and penalties be found due and payable as per the Objection Decision rendered by the Respondent.

Issues For Determination 91. The Tribunal upon the careful consideration of the Pleadings, Statements of Facts and submissions made by the parties respectively, is of the view that the issues for determination are:i.Whether the assessments are statute time barred;ii.Whether the Respondent erred in disallowing bad debts written off by the Appellant; and,iii.Whether the Respondent erred in deeming a dividend on the adjustment of the low-value add services provided by the Appellant to the group entities and assessing Withholding Tax.

Analysis And Findings 92. The Tribunal wishes to analyse the issues identified hereunder.

i. Whether the assessments are statute time barred; 93. The Appellant did not raise this issue therefore the Tribunal examines it Suo moto on the basis that the Respondent issued assessment orders dated 19th June 2023 seeking to recover income tax including the income tax for the period 1st January 2017 to 31st December 2017. Therefore, it is necessary to find out whether the Respondent’s assessments are within the five-year rule.

94. To begin with, Section 23 (1) (c) of the Tax Procedures Act on record keeping requires a taxpayer to keep record for five years or shorter. It provides that, ‘‘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.’’ The mischief that Section 23 (1) (c) of the Act is trying to cure is that the Respondent cannot issue assessments that are beyond five years and expect a tax payer to produce such documents. Documents get misplaced, some are damaged while some wear off with time.

95. Section 29 (5) of the Tax Procedures Act prohibits assessing taxes beyond five years. It provides as follows:“Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.’’

96. Further, Section 31 (4) (b) of the Tax procedures Act prohibits making additional assessments beyond five years. It provides that the Respondent may amend an assessment within five years for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or for any other assessment, the date the Commissioner notified the taxpayer of the assessment.

97. Section 52 B (1) (b) of the Income Tax Act provides timeframes as well. It provides that,“every person, other than an individual chargeable to tax under the Act, shall for any accounting period commencing on or after 1st January, 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax on such income, not later than the last day of the sixth month following the end of the year of income.’’

98. In absence of any other accounting period from the Respondent or the Appellant, the Tribunal relies on Section 52 B (1) (b) to find that last date for filing tax returns under the law is 30th day of June of each year.

99. Pursuant to Section 23 (1) (c), Section 29 (5), and Section 31 (4) (b) of the Tax procedures Act as read together with Section 52 B (1) (b) of the Income Tax Act, and in absence of any other accounting period from the Respondent or the Appellant, the Respond is barred from recovering taxes for the year 2017. However, this subject to exceptional conditions as provided for under Section 29 (6) and Section 31 (4) (a) of the Tax procedures Act which gives the Respondent leeway to assess taxes beyond five years in cases of gross or wilful neglect, evasion or fraud by a taxpayer.

100. The question then is whether the Respondent availed to itself the justification in law to carry out the assessments under Section 29 (6) or under Section 31 (4) (a) of the Tax procedures Act. This Tribunal in the case of Gitere Kahura Investments Ltd vs. Commissioner of Investigations and Enforcement Tax Appeal No. 16 of 2019 was of the view that pursuant to Section 107 and 108 of the Evidence Act, the burden of proof falls upon the Respondent who must prove that the Appellant’s failure to file returns was motivated by gross or wilful neglect to file returns, attempt to evade paying taxes or fraud by a taxpayer.

101. Pursuant to the foregoing, it then follows that the Respondent bears the burden of proof to demonstrate that the Appellant herein was in breach of Section 29 (6) or under Section 31 (4) (a) of the Tax procedures Act to justifying reopening taxes that are beyond five years.

102. There is no evidence on record by the Respondent attempting to prove that the Appellant breached Section 29 (6) or Section 31 (4) (a) of the Tax Procedures Act to justify making assessments for the year 2017 for Income Tax.

103. The Tribunal, therefore finds that the assessments for the year 2017 for Income Tax are statute time barred, thus null and void ab initio. Those assessments ought to be expunged from the records and are hereby expunged.

104. The Tribunal finds that the Respondent was not justified to assess for the taxes for the year of income 2017.

ii. Whether the Respondent erred in disallowing bad debts written off by the Appellant; 105. The Appellant’s case is that it made a provision for bad debts which according to it, are supposed to be allowed by the Respondent for the purpose of ascertaining the total income of any person for a year of income.

106. On the other hand, the Respondent argued that whereas bad debts are to be allowed, the tax payer has to satisfy the Respondent that the debts have become bad, and doubtful.

107. Both parties relied on the provisions of Section 15 of the Income Tax Act and the guidelines stipulated in the Legal Notice no. 37 of 2011 on the Guidelines on Allowability of Bad Debts (hereinafter referred to as the ‘Guidelines’).

108. Section 15 (2) (a) of the Income Tax Act provides as follows:‘‘without prejudice to sub-section (1) of this section, in computing for a year of income the gains or profits chargeable to tax under section 3(2)(a) of this Act, the following amounts shall be deducted:(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.’’

109. Paragraph 2 of the Guidelines provides as follows:‘‘A debt shall be deemed to have become uncollectable under paragraph (1) where(a)The creditor loses the contractual right that comprises the debt through a court order;(b)No form of security or collateral is realisable whether partially or in full;(c)The securities or collateral have been realized but the proceeds fail to cover the entire debt;(d)The debtor is adjudged insolvent or bankrupt by a court of law;(e)The costs of recovering the debt exceeds the debt itself; or(f)Efforts to collect the debt are abandoned for another reasonable cause.’’

110. The Appellant relied on the case of Equity Bank Kenya Limited vs. Commissioner of Domestic Taxes 2021 and averred that in order to benefit from tax deduction on account of bad debts the taxpayer needs only to establish one of the grounds set out in paragraph 2 of the Guidelines. It further contended that it satisfied at least two grounds in arriving at the decision to write off the bad debts and has demonstrated that the cost of recovering the bad debts written off is greater than the debts and that no form of security or collateral is realisable whether partially or in full. On the other hand, the Respondent averred that the Appellant on admitted that it met only two requirements set out under the Guidelines.

111. The Tribunal notes that the Guidelines provides a list of six items linked with coordinating conjunction ‘OR.’

112. The ‘confusion’ arising from the use of coordinating conjunction ‘‘AND’’ and ‘‘OR’’ in statutes is not novel. The Supreme Court in Odinga & another vs. Independent Electoral and Boundaries Commission & 2 others; Aukot & another (Interested Parties); Attorney General & another (Amicus Curiae) (Presidential Election Petition 1 of 2017) [2017] KESC 42 (KLR) found that using coordinating conjunction ‘OR’ means that the provided statements should be interpreted disjunctively.

113. Based on the foregoing reasoning, the Tribunal finds that the use of coordinating conjunction ‘OR’ at the end of the list of the said Guidelines simply means that a tax payer has to prove any one of the grounds the Guidelines. Therefore, the Appellant’s position is correct in not troubling itself by attempting to prove all the six grounds/conditions.

114. Having found that a tax payer need only prove one of the six grounds stated in the Guidelines, the Tribunal limits itself to the two grounds that the Appellant attempted to prove. That is to say, the Tribunal shall examine whether the Appellant demonstrated that the cost of recovering the bad debts written off is greater than the debts and that no form of security or collateral is realisable whether partially or in full, as outlined herein under.a.The costs of recovering the debt exceeds the debt itself

115. It is the Appellant’s case that it demonstrated that the cost of recovering the bad debts written off is greater than the debts. In an attempt to prove this assertion, the Appellant relied on the report on quantification of costs dated 30th January 2023. The report indicates that the cost of recovering the bad debts written off is greater than the debt itself. Curiously, the Respondent did not comment or challenge the contents of the said report. It then follows that the report is not rebutted and/or challenged.

116. The Respondent argued that the Appellant ought to have used its Direct Sales Representatives (DSRs) who are based closer to the debtors to trace the debtors and recover the debts. On the hand, the Appellant maintained that the role of DSRs is sales not debt recovery and as such the Appellant had to employ additional staff to recover the debt or use the existing DSRs but add them allowances for recovery of the debts. The Appellant also noted that its customers are composed of low-income earners who make a deposit of Kshs. 50. 00 per day towards repaying the debt.

117. The Appellant also listed the activities it carried in attempt to recover the debts including making calls, payment reminders, and request to return the product, and when these clients failed to repay the debt, the Appellant referred them to the Credit Reference Bureau (CRB) for blacklisting.

118. Based on the foregoing, the Tribunal is of the view that the Appellant cannot be accused of not making any efforts or employing mechanisms in a bid to recover the debt.

119. It should be recalled that Section 15 (2) (a) of the Income Tax Act refers to bad and doubtful debts. The Tribunal notes that whereas the Appellant has DSRs who can trace the debtors, tracing them is not the issue. The issue is tracing them and compelling to make the payment of the debt. This makes the debt doubtful because the debtor may be found but there is no assurance that the debtor will pay the debt. Secondly, the Respondent has not denied that some of the debts in issue were incurred before 2016. This brings into play the provisions of Section 4 of the Limitation of Actions Act, which provides that contractual claims may not be brought after the end of six years from the date on which the cause of action accrued.

120. It means that even if the Appellant used DSRs to trace the debtors, the debtors would be traced and found but recovery cannot proceed to due to provisions of under the Limitation of Actions Act. This points to the fact that the debts were not only doubtful, but were bad debts.

121. The Tribunal noted that the Respondent requested for documents in relation to auctioneers to demonstrate that the Appellant attempted to recover the debts. Lawfully, there are certain circumstances that an Auctioneers can proceed to recover a debt in the absence of a decree and judgement of court, the prevailing circumstances do not qualify for an action of recovery of debt in the absence of a decree and judgment of the Court. Therefore, the Tribunal observes that the Appellant would not be reasonably expected to comply with such a request.

122. The Respondent having not challenged the findings of the report on quantification of costs dated 30th January 2023, and bearing to mind the foregoing reasoning, the Tribunal is of the view that the Appellant has demonstrated that the costs of recovering the debt exceeds the debt itself as provided for under paragraph 2 (e) of the Legal Notice no. 37 of 2011 on the Guidelines on Allowability of Bad Debts.b.No form of security or collateral is realisable whether partially or in full

123. It is to be noted that the taxpayer only needs to establish one of the grounds set out in paragraph 2 of the Guidelines, and the Tribunal having found that the Appellant was able to demonstrate that the costs of recovering the debt exceeds the debt itself as provided for under paragraph 2 (e) of the Guidelines, the Tribunal shall not delve into the second ground.

124. Consequently, the Tribunal finds and holds that the Respondent erred in disallowing bad debts written off by the Appellant.

iii. Whether the Respondent erred in deeming a dividend on the adjustment of the low-value add services provided by the Appellant to the group entities and assessing Withholding Tax. 125. The Tribunal carefully considered the parties pleadings in relation to this issue. The Tribunal noted that at paragraph 35 of its Statement of Facts, the Appellant admits that it provided services to related parties. However, the Appellant failed to disclose the services that it provided, the cost thereof, and failed to disclose the identity of the said related parties. This amounts to ambiguity and non-disclosure of material facts.

126. The Tribunal made reference to paragraph 36 of the Appellant’s Statement of Facts, where it submitted that the services the management were providing to other M-Kopa Group entities continuously declined. However, the Appellant failed to disclose the costs of those services and the timelines when the services begun declining. This amounts to ambiguity and non-disclosure of material facts.

127. Further, at the paragraph 37 of the Statement of Facts, the Appellant did not disclose the cost of the support of services that it offered to the non-resident parties. This amounts to ambiguity and non-disclosure of material facts. Therefore, the Tribunal does not agree with the Appellant’s assertions at Paragraph 38 of its statement of facts that, ‘‘the Respondent erred by assuming that the level of support provided by the Appellant to the group entities has remained the same over the years.’’ If the Respondent erred on this issue then it is because the Appellant failed to disclose material facts to facilitate the Respondent in making correct decision.

128. Whereas the Appellant at the paragraph 39 of the Statement of Facts states that the Respondent’s attribution of various costs to the Appellant providing services to other groups is erroneous, the Tribunal finds that paragraph 39 (a) of the Appellant’s Statement of Facts is nothing but conjecture. The Appellant stated that ‘Directors’ remuneration is determined for each company and is ‘usually’ based on the performance of the company. This is conjecture and the Appellant did not provide evidence to back up this opinion. Secondly, at paragraph 39 (a) the Appellant failed to specify when the services to the so-called related entities dwindled neither does the Appellant the costs involved. Thirdly, the Appellant at paragraph 39 (c) of its statement of facts asserted that,“we note that the Respondent picked the full cost attributable to international travel, without due consideration as to whether these were all related to the Group entities activities.”

129. The above assertion does not aid the Appellant’s case because it failed to specify which costs related to the Appellant but were ignored by the Respondent. Secondly, there is no evidence to back the assertion.

130. Whereas the Appellant at paragraph 40 of its Statement of Facts asserted that the Respondent erred in marking up international travel, air tickets, accommodation, meals and per diem and other expenses costs which is against the general principles provided by the Organization for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines, the Appellant did not provide the total costs on this issue for the Tribunal to examine. The Appellant failed to provide evidence to back up its claim.

131. The Appellant was aggrieved that the Respondent deemed a dividend of Kshs. 96,641,331. 00 in 2018, 2019 and 2020 in line with Section 7 (1) (b) of the ITA leading to issuance of a WHT assessment of Kshs. 16,737,182. 00. According to the Appellant, the deemed dividend is a result of the Transfer Pricing adjustment relating to provision of low value services by the Appellant to its non-resident related parties. The Tribunal finds that whereas the Appellant admitted at paragraphs 35, 36, 37, 38 and 39 of its Statement of Facts that it provided services to its related services, the Appellant failed to provide the cost of those services. Therefore, the Tribunal cannot fault the Respondent for finding that the services that the Appellant provided were undervalued.

132. The Tribunal is of the considered view that when a person deducts tax, such a person is under statutory duty to remit the tax so deducted to the Commissioner in accordance with the provisions of the law. In this regard, Section 35 (5) of the Income Tax Act provides as follows:“(5) Where a person deducts tax under this section he shall, on or before the twentieth day of the month following the month in which the deduction was made—(a)remit the amount so deducted to the Commissioner together with a return in writing of the amount of the payment the amount of tax deducted, and such other information as the Commissioner may specify; and(b)Furnish the person to whom the payment is made with a certificate stating the amount of the payment and the amount of the tax deducted.’’

133. It then follows that, if the Appellant deducted taxes, it had the obligation to remit the deducted taxes to the Respondent.

134. The Tribunal finds that the Appellant failed to provide material facts to substantiate its case in relation to this issue. For instance, the Appellant failed to provide material facts concerning the cost of services that it offered to the so called ‘related entities’ therefore, there is no basis for the faulting the Respondent’s valuation of Transfer pricing. The entities are not clearly defined by the Appellant. The Appellant failed to clearly state whether those ‘the related entities’ are resident or non-resident entities for the purposes of Income Tax Act. The only piece of evidence on this issue is Annex 1 which is a mere tabulation showing ‘services to related parties’ without primary evidence to support it. The said tabulation, from the face value, cannot be deemed as authentic evidence that can be applied in the support this Appeal, for the reason that the same is a table prepared by the application of a basic computer programme, that in the Tribunal’s view can be prepared by anyone with basic computer skills. The table marked as annex 2 suffers the same predicament. In short, Annex 1 and 2 have no probative value.

135. Section 56 (1) of the Tax Procedures Act provides that;“in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.’’

136. Similarly, Section 30 of the Tax Appeals Tribunal provides that;“In a proceeding before the Tribunal, the appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.’’

137. In Digital Box Limited vs. Commissioner of domestic investigations and Enforcement [2020] this Tribunal affirmed that that the burden to prove that the Commissioner’s decision is wrong falls on the taxpayer.

138. The Tribunal finds that the Appellant failed to discharge its burden of proof in relation to this issue.

139. Consequently, the Tribunal finds and holds that the Respondent did not err in deeming dividend on the adjustment of the low-value add services provided by the Appellant to the group entities and assessing Withholding Tax thereon.

Final Determination 140. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal partially meritorious and consequently makes the following orders; -a.The Appeal be and is hereby partially allowed;b.The Objection Decision dated 14th September 2023 be and is hereby varied in the following terms;i.The assessment made by the Respondent for year of income 2017 be and are hereby set aside;ii.All bad debts written off by the Appellant be and are hereby allowed; and,iii.The Respondent’s deemed dividends - Transfer pricing and assessments on withholding Tax be and hereby upheld;a.Each party to bear its own cost.1. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 4TH DAY OF OCTOBER 2024ROBERT M. MUTUMACHAIRPERSONMUTISO MAKAU ELISHAH N. NJERUMEMBER MEMBERBERNADETTE GITARI ABDULLAHI DIRIYEMEMBER MEMBER