[2024] KETAT 945 (KLR)

Merica Service Station Limited v Commissioner of Domestic Taxes (Tax Appeal 446 of 2023) [2024] KETAT 945 (KLR) (Civ) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 945 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 446 of 2023

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

July 12, 2024

Between

Merica Service Station Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya and a registered taxpayer in Kenya. The Appellant is engaged in the business of operating a fuel station, cafe and a mini shop in Mwea Town and was licensed to import sugar in 2019 and 2020 but not trading locally in the said commodity and is also closely related to Paleah Stores Limited.

2. The Respondent is the principal officer appointed under the Kenya Revenue Authority Act and mandated with the responsibility of assessing, collecting, and accounting for the tax revenues on behalf of the Government of Kenya. The Respondent is also mandated with the responsibility of the administration and enforcement of the statutes under the schedule to the said Act.

3. The dispute herein arose out of the assessment of the Appellant issued on 20th February 2023 on Corporation Tax in the sum of Kshs. 20,203,186. 00 being principal tax, penalties and interest for the period of review 2019 and 2020.

4. The Appellant lodged its Objection on 11th March 2023, the Respondent rejected the Objection, invalidating the Objection for want of documents and confirmed it assessment on 11th April 2023.

5. The Appellant being dissatisfied with the Respondent’s Decision filed the Appeal by lodging its Notice of Appeal dated 21st August 2023 and filed on 12th September 2023 with leave of the Tribunal to file appeal out of time being granted on 29th August 2023.

The Appeal 6. The Appellant vide its Memorandum of Appeal dated 11th September 2023 and filed on 12th September 2023 sets out the following grounds of appeal; -a.That the Respondent erred both in fact and law by failing to predicate its Objection Decision on material facts and consequently based its decision on extraneous considerations, thus arriving at an incorrect and exaggerated figure of taxable income.b.That the Respondent erred in law and fact by failing to acknowledge the sales to a related Company as evidenced in the invoices Inv29 of 1/07/2019, Inv24 of 31/07/2019, Inv20 of 31/07/2019, Inv25 of 31/07/2019, Inv30 of 31/07/2019, Inv 26 of 31/07/2019, Inv23 of 31/07/2019, Inv28 of 31/07/2019, Inv32 of 31/07/2019, Inv22 of 31/07/2019, Inv31 of 31/07/2019, Inv50 of 31/12/2019 amounting to Kshs. 177,792,604. 00 for supplies to Paleah Stores that had catered for all the cost of sales for the consignment.c.That the Respondent erred both in fact and law by basing its tax assessment dated 11th March 2023 upon the gross profit ratio of 23. 53% for the year 2021 other than the documents kept and maintained by the Appellant to record sales and consequently arrive at a misapprehended finding that there existed alleged profit on sale.d.That the Respondent erred in both fact and law in re-determining the Appellant’s taxable income for both 2019 and 2020 years of income whereas the Appellant had paid up all taxes due on its income for those years.e.That the Respondent erred in finding that the Appellant is liable to pay Kshs. 10,522,003. 80 and 2,028,376. 11 as tax for 2019 and 2020 years of income respectively whereas the consignment was sold to a related company at cost.f.That the Respondent erred in fact and law in assessing and reassessing the Appellant’s taxable income on considerations that are extraneous and in flagrant disregard to Income Tax Act and the Tax Procedures Act.g.That the Appellant effectively discharged its onus of proof as imposed on it by Section 51 and 56 of the Tax Procedures Act as the documents furnished by it during the review of the Objection application were sufficient to compel in part the vacation of the assessed taxes.h.That the Respondent’s Objection Decision was time barred as the said decision was issued after the lapse of 60 days as required under Section 51 of the Tax Procedures Act.

The Appellant’s Case 7. The Appellant has set out its case on its;a.Statement of Facts dated 11th September 2023 and filed on 12th September2023 together with the documents annexed thereto.

8. The Appellant stated that it imported sugar and transferred the commodity to a sister company through intra group transaction vide invoices.

9. The Appellant averred that it held meetings with the Respondent and supplied all support documents and explanations, which were ignored on 20th February 2023 and issued additional assessments thereto.

10. The Appellant contended that on the 11th March 2023 it disputed the alleged additional assessment on the said transaction and furnished the Respondent with the full details of the invoices of sale between it and Paleah Stores, whereof on 13th March 2023 the Respondent issued another tax assessment on Income Tax and VAT in the respective sums of Kshs. 20,203,187. 00 and Kshs. 10,353,556. 00 inclusive of penalties and interest based on unfounded grounds.

11. The Appellant stated that on 18th May 2023 the Respondent fully rejected the objection application for Kshs. 10,522,003. 80 on iTax portal vide a Confirmation of Assessment Notice, which decision was statute barred as it was seven days late.

12. The Appellant stated that its Director was out of the country at the time and was therefore unable to present the Appeal on time, upon application it was granted leave to file appeal out of time on 29th August 2023.

13. The Appellant submitted that it was issued with a final demand notice on tax arrears of Kshs. 12,550. 380. 00 on 10th August 2023 and on 17th August 2023 the Respondent issued agency notices to the Appellant’s bankers demanding recovery of the demand sum.

14. The Appellant contended that in the year of tax 2019, it engaged in sales transactions with a related sister company namely Paleah Stores Limited, which sales were conducted at a price that resulted to no profit for the Appellant as the two companies share a close relationship through common ownership and control.

15. The Appellant stated that all relevant costs of sales associated with the said commodity were paid by Paleah Stores, which included costs of goods sold, transportation expenses and any other direct or indirect costs incurred and therefore the profits to the Appellant were significantly diminished or virtually non-existent.

16. The Appellant asserted that the transactions with Paleah Stores Limited were meticulously conducted at arm’s length as the pricing and terms of the transactions were determined in conformity with market conditions and in a manner consistent with what would have been agreed upon between two related companies.

Appellant’s Prayers 17. By reason of the grounds aforesaid the Appellant prayed that;a.This Appeal be allowed;b.The Respondent’s Objection Decision dated 18th May 2023 be struck out in its entirety;c.The costs of this Appeal; and,d.Any other remedies that the Honourable Tribunal deems just and reasonable.

The Respondent’s Case 18. The Respondent’s case is set out in its;a.Statement of Facts dated 18th October 2023 and filed on 19th October 2023 together with the documents attached thereto;

19. The Respondent averred that it issued a tax assessment order on 20th February 2023, to which the Appellant lodged its Objection on 11th March 2023 however, it failed to state the grounds of Objection nor provide documents supporting its objection despite being requested to do so vide the email dated 21st March 2023.

20. The Respondent avowed that it reminded the Appellant vide the email dated 29th March 2023 regarding the supply of documents in support of the objection, the Appellant having failed to provide supporting documents, the Respondent invalidated the Appellant’s Objection on 11th April 2023 and confirmed the assessment.

21. The Respondent relied on Section 24 of the Tax Procedures Act and maintained that in computing the taxes it made use of information obtained from internal system and third-party information in the absence of sufficient documents from the Appellant.

22. Further, the Respondent asserted that the above section establishes the Respondent’s power to assess, demand and collect taxes.

23. The Respondent avowed that the Appellant was neglectful of its duty to pay taxes and by further failing to declare its income.

24. The Respondent stated that the Objection Decision was issued within 60 days as the invalidation notice was sent on the 11th April 2023, however the notice dated 18th May 2023 was merely confirming that taxes were due and payable.

25. The Respondent thus failed to meet the burden of proof contrary to Section 56 (1) of the Tax Procedures Act, in establishing the incorrectness of the Respondent’s decision.

26. The Respondent asserted that Section 59 of the TPA empowers it to require the production of documents and information to enable the Respondent ascertain the tax liability of a person.

27. The Respondent relied on the following case law;i.Okiya Omtatah Okioti v the Attorney General and the Kenya Revenue Authority.

Respondent’s Prayers 28. The Respondent prayed that this Tribunal finds, that;a.The Objection Decision dated 11th April 2023 be upheld; and,b.This Appeal be dismissed with costs.

Issues for Determination 29. The Tribunal having carefully considered the parties pleadings is of the considered view that the Appeal distills into the following issue for its consideration, as follows;Whether the Respondent’s decision to the Appellant’s Objection lodged on 11th March 2023 was proper in law;

Analysis And Determination 30. The Tribunal shall proceed to analyze and determine the issue as follows;

31. It was the Appellant’s argument that upon being issued with the assessment on 20th February 2023, it filed its Objection on 11th March 2023 and consequently the Respondent issued its Objection Decision on 18th May 2023. That the Objection Decision as issued was not proper in law as the same was issued contra statute and in violation of Section 51 (11) of the Tax Procedures Act.

32. Contrarywise, it was the Respondent’s legal argument that upon receipt of the Appellant’s objection on 11th March 2023, it issued a notice of invalidation on the 11th April 2023 premised on the Appellant’s failure to validate the Objection which had been treated as invalid.

33. Further, the Respondent asserted that it did not issue any decision on 18th May 2023, rather the correspondence dated 18th May 2023 merely confirmed that taxes were due and payable and that did not amount to a decision.

34. The question that the Tribunal ought to determine is what decision and when the same issued by the Respondent.

35. The Tribunal has perused the record and from the parties documentation it did not sight any decision issued on 18th May 2023, however, it sighted a notice of invalidation issued on 11th April 2024.

36. The law under Section 13 (2) (c) of the Tax Appeals Tribunal Act contemplates that the Appellant ought to file the tax decision, subject of its Appeal, in the instant case, the Appellant has not done so, but be that as it may, the decision to the Appellant’s Objection of 11th April 2023 is before the Tribunal. In any event, a notice of invalidation to an Objection is an appealable decision, which was issued on 11th April 2023, prior to the alleged Objection Decision of 18th May 2023.

37. It the Tribunal’s position is that the Respondent’s decision subject of interrogation is the invalidation of the Appellant’s objection issued on 11th April 2023.

38. From the documentation presented in the Appeal, the Tribunal noted that the upon lodging of the Objection by the Appellant, the Respondent treated and notified the Appellant of the invalidity of its objection vide the email dated 21st March 2023 and issued a reminder thereto vide the email dated 29th March 2023, which email extracts have been filed with the Tribunal.

39. As relates to invalid objections, the Respondent’s is obligated by law prior to any action to notify the Appellant and call for the relevant action under the provisions of Section 51 (4) of the Tax Procedures Act, the section provides;“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall notify the taxpayer within 14 days in writing that the objection has not been validly lodged”

40. The Tribunal has perused the Respondent’s email of 21st March 2023 and noted that the same provided in part as follows;“We note that you have not attached the objection grounds nor any support documents as required by section 51 (3) of the Tax Procedures Act.Kindly furnish us with these critical records to validate your objection as soon as possible but not later than 24th March 2023”

41. A perusal of the Appellant’s Notice of Objection divulges that the same did not contain the grounds of objection and was in contravention of the provisions of Section 51 (3) (a) of the Tax Procedures Act and in that state, suffice it to say that the Appellant did raise any objection to its notice of objection provided by the Respondent, the objection could not have constituted or have been treated as a valid objection.

42. Having established as above, the Appellant’s obligation was to provide the grounds of objection and supporting documents to validate the objection.

43. The Tribunal noted that the Appellant did not present any evidence to the effect that it provided the grounds of objection and/or the documentation in support of its objection or make any attempts to validate its objection, as requested by the Respondent.

44. As a consequence, and in light of failure to validate an objection the Tribunal finds that the Respondent did not err, thus was justified to issue a Notice of Invalidation to the Appellant’s Objection. The Appellant’s Appeal therefore fails.

Final Determination 45. The Appellant’s Appeal being unmerited, the Tribunal makes the following orders;a.The Appeal be and is hereby dismissed;b.The Respondent’s Invalidation Decision issued on 11th April 2023 be and is hereby upheld; and,c.Each party to bear their own costs.

46. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY 2024ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHA N. NJERU - MEMBERBERNADETTE M. GITARI - MEMBERABDULLAHI DIRIYE - MEMBER